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Three-Year-Low Service PMI Stokes Fears of Continued Pound Weakness

Published: 4 Mar at 3 PM Tags: Euro, Dollar, Pound Sterling, America, UK, Eurozone, Australian Dollar, New Zealand Dollar, Canadian Dollar, Australia, New Zealand, USA, Canada, Germany,

Pound Sterling
Confirming investor fears, data from Thursday morning showed that Britain’s strong service sector was growing at an almost three-year-low pace in February. Output dropped by considerably more than analysts expected it would; from 55.6 to 52.7. This new result, alongside other data releases from this week, put all major British sectors lower than 55 – and lower than expected.

One of the main causes for sliding output is ‘Brexit’ fears and anxieties. This is coupled with continued weakness in oil prices and Asian market difficulties shaking the confidence of Britain’s usually-confident service sector – a sector that accounts for over 70% of UK’s economy. Analysts already fear the effects this PMI plummet could have over the coming months, as even businesses who have been investing in the UK market despite current affairs are now likely to hesitate on new investments until the June 23rd EU referendum arrives and, depending on the result, possibly longer.

Following this, the Pound was unsurprisingly weakened over Thursday against many major currencies but held strong against others.

US Dollar
The ‘Cable’ exchange rate rose yesterday despite disappointing UK data. The pair was able to rise by around a cent, reaching a ten-day high.

This is presumed to be caused by the US Dollar suffering from poor domestic PMI data, which unlike UK data have remained below the 50 mark in services – falling to a disappointing 49.7. This is the first contraction since October of 2013 and investors have interpreted this to mean that policymakers will not vote to raise rates again in March. The Federal Reserve is forecasted to raise rates by 50 basis points in 2016, lowered since December’s forecast of 100 points of hikes throughout the year.

Highly important US nonfarm payroll data will be released later today and is likely to affect ‘Cable’ in a considerable way depending on results. This gauge of market labour is estimated to have increased by around 193k over January’s 151k, which if true would give the ‘Buck’ a boost. It’s also possible however that potentially negative wages reports to be released this afternoon could keep Sterling holding on to its highs.

The Pound to Euro pair was not able to hold a steady point throughout Thursday. Disappointing UK service data was responsible for large sharp drops in strength against the shared currency.

Poor releases considered, the Pound was able to regain some ground as the day continued and escape with minimal losses in the GBP/EUR exchange rate. It is thought that the Euro has also been experiencing market turbulence as investors anticipate monetary policy changes from the European Central Bank next week.

Due to bets over what action the ECB may take next week, GBP is likely to maintain or even gain some strength over this period despite the PMI release. After the ECB’s decision on whether or not to loosen monetary policy is released and priced into the market, Sterling’s luck may run out and the currency could continue to trend downwards until the EU vote – only returning to an uptrend if Britain decides to remain in the EU.

The Pound’s downtrend could well begin early after Friday data put German and Eurozone Retail PMIs comfortably above the 50 mark - with 52.5 from 49.5, and 50.1 from 48.9 respectively.

Australian Dollar

The GBP/AUD exchange rate continued to fall yesterday, dropping by around a cent. Momentum from Australia’s good growth figures earlier in the week coupled with Britain’s service sector worries keep the pairing on its current long downtrend – hitting a near-ten month low. Poor data releases from the United States implied that further interest-rate hikes from the Federal Reserve throughout 2016 are unlikely, rewarding traders looking to invest in AUD.

New Zealand Dollar
The Pound dropped considerably on Thursday, losing around -150 pips against the NZD as the ‘Kiwi’ held firm during the UK’s poor service sector performance. The New Zealand Dollar also capitalised on the same Federal Reserve bets as AUD did, as poor US data decreased the chances of further interest-rate hikes in 2016. This lack of confidence in the Fed’s policy tightening plans means New Zealand investors are likely to enjoy further months of low borrowing costs.

Canadian Dollar
Sterling continued to strengthen against the ‘Loonie’ by approximately 70 pips as the week drew to an end. However, recovery in oil prices kept the pair from growing too considerably. Oil prices began to rise due to improved hopes of a pact between oil producers, causing increased demand for the CAD. It’s likely that GBP/CAD gains were driven more by Sterling’s continued growth over the US Dollar and the cross-flow between the pairings.

It is possible that as poor British PMI performances set in and the oil situation continues to improve in Canada, the pairing may weaken in the coming weeks.
As of Friday, 4th March 2016, the Pound Sterling currency rates mentioned within this news item were as follows:

GBP EUR exchange rate was 1.2925, GBP USD exchange rate was 1.4227, GBP AUD exchange rate was 1.913, GBP NZD exchange rate was 2.0859, and GBP CAD exchange rate was 1.8942.
Patrick James About Author: (289 Posts)Patrick completed his economics degree just as the global financial crisis struck in 2008. In the intervening years Patrick has made his mark, climbing to a prominent position within a large financial services provider. As part of his role Patrick uses his expertise to advise companies of the best ways to safeguard against currency risk.

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