Pound edges off three month highs after weak activity data

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4 January 2018


Sterling has had a fairly topsy-turvy start to 2018. The currency jumped to a three month high on Tuesday, although lost around half a percent of its value against the Dollar yesterday to end trading just above the 1.35 mark.

he UK currency had rallied to its strongest position since 20th September on the first full day of trading this year, just shy of its highest position since Britain voted to leave the European Union in 2016. However, investors were cautious to drive the currency even higher considering a lack of any major catalyst that would warrant a stronger Sterling.

Another disappointing set of PMI data from Markit also far from helped the currency. The construction index slipped to 52.2 in December from the previous 53.1. This comes off the back of Tuesday fairly dismal manufacturing index, both of which have raised concerns over an overall economic slowdown in the UK. Regardless, this is still a fairly strong reading and comfortably above the level of 50 that denotes expansion, suggesting that the housing market in the UK remains in decent shape.

Focus in the UK continues to remain on the Brexit negotiations, which this month will shift talks to trade.

Federal Reserve split on pace of rate hikes in 2018

The Dollar edged modestly higher on Wednesday off of its lowest level in three months, buoyed by a fairly impressive set of economic data. Yesterday afternoon’s manufacturing PMI from ISM came in well above consensus at 59.7 from November’s 58.2, suggesting that the US services sector powered ahead at the end of 2017.

Last night’s Federal Reserve minutes from its December meeting barely moved the greenback, continuing to suggest that the central bank remains on course to raise interest rates on multiple occasions this year, albeit they were split as to how fast rates would increase. FOMC officials also voiced hope that Donald Trump’s tax overhaul would boost activity in the US with some noting that ‘expectations of tax reform may have already raised consumer spending somewhat’. We think the combination of Trump’s tax reform, a strong labour market and rising inflation dynamics could be enough to ensure as many as four rate hikes in the US this year, a much faster pace than the 2 currently priced in.

Yesterday was a very quiet one in terms of announcements in the Euro-area economy, with the common currency driven by events elsewhere. The Euro spent much of the day trading around the 1.20 mark, just shy of its highest level in four months. This morning’s PMI data provided reason to be optimistic, although was not materially strong enough to shift the currency markets. December’s services PMI was revised modestly higher to 56.6 from 56.5 as the Eurozone economy continues to outperform almost all expectations.