Sterling falters after services activity falls to lowest level since Brexit vote

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5 April 2018

thomasdodds

The Pound slipped against its major peers this morning after a very underwhelming services PMI caused investors to fret about the possibility of an economic slowdown in the UK in the first quarter of the year.

T
he UK’s services index sank to just 51.7 last month after investors had eyed a 54.0 reading, its softest rate of growth since the EU referendum. This is a worrying sign that could cause some members on the Bank of England’s MPC to re-evaluate the need for higher interest rates when the bank meets next month.

Growing concerns surrounding the possibility of a full blown trade war between the US and some of its major trading partners had led to another risk off session of trading in the FX markets on Wednesday. The US Dollar fell against the safe-haven Swiss Franc and Japanese Yen after it was announced that China had retaliated against the Trump Administration’s plans to place tariffs on Chinese imports. China moved to announce trade sanctions of its own, saying it would place a 25% tariff on 106 US goods including soybeans and industrial goods, a matter of hours after Trump had detailed around 1,300 Chinese products that the US had intended to hit with tariffs.

Despite the swift move of retaliation, Chinese authorities reiterated that they were not interested in a trade war, although would not back down to US pressure. This has undoubtedly created increased uncertainty among investors that fear the protectionist policies of Donald Trump’s Presidency could inhibit global growth.

Economic news mostly took a back seat amid the heightened political narrative. US Data that we did see came in fairly mixed. The US ADP employment report, seen as a fairly good gauge of overall labour market strength, smashed expectations, coming in at a very healthy 241k vs. 205k consensus. Services sector data was contrastingly poor, with the PMI from Markit unexpectedly declining to 54 from 54.1 in March. All eyes now turn to tomorrow’s nonfarm payrolls report.

Euro range bound as investors await nonfarm payrolls release

The Euro will likely have to wait until Friday’s payrolls report out of the US if it is to break out of its recent range. The common currency has been confined to a relatively narrow 90 pip range in the past week. Yesterday’s Eurozone inflation data for March had limited impact on the currency, despite the headline rate jumping back to 1.4%, its highest level in 3 months. Concerns undoubtedly remain over the increasingly soft level of core inflation, which remained stuck at just 1% for the third straight month in March.

This morning’s Euro-area services PMI also undershot expectations, another sign that the Euro-area economy may be slowing following its best year in 10 in 2017. The monthly index slipped to 54.9 from 55.0, reinforcing our view that the European Central Bank will be very reluctant to increase interest rates in the currency bloc until deep into 2019.