Sterling Mixed after Manufacturing Data
The Pound kicked off the New Year on mixed form, hitting a three-month high against the ‘Greenback’ on one hand but softening against the Euro and other commodity-based currencies on the other.
Domestic data from the UK today remained somewhat sparse, with the only pertinent release being the UK’s December manufacturing purchasing managers index (PMI).
According to the December survey, manufacturing in the UK slowed from its recent four-year high, falling from 58.2 to 56.3, below the forecast of 57.9.
Despite this fall, the sector continues to present strong growth momentum.
Rob Dobson of IHS Markit commented on the positive aspects of the reading:
‘Although growth of output and new orders moderated during December, rates of expansion remained comfortably above long-term trend rates’.
In addition, manufacturing only accounts for some 10% of the UK’s economy, somewhat limiting the significance of the reading.
Pound Euro (GBP/EUR) Slides as Eurozone Manufacturing PMI Hits Record High
The Pound Euro exchange rate stumbled on Tuesday, falling in reaction to a strong IHS Markit manufacturing PMI for the Eurozone.
The survey index climbed to 60.6, up from the previous period’s 60.1 and in-line with the forecasts.
This resulted from robust readings in output, new orders and employment within the sector, positivity that ultimately pushed the Eurozone’s final manufacturing PMI of 2017 to its highest level since mid-1997.
Markets will be looking tomorrow to Germany’s unemployment figures, Thursday’s services and composite PMI readings and Friday’s highly anticipated consumer price index figures, with the headline year-on-year figure expected to fall from 1.5% to 1.4% in the bloc.
Pound US Dollar (GBP/USD) Exchange Rate Extends Lead, Hits 3-Month High
The Pound US Dollar exchange rate extended its lead into the New Year, hitting a fresh three-month high on Tuesday on investor concern regarding the US monetary policy outlook for 2018 and indifference towards the recent successful implementation of sweeping US tax reform.
Whilst the US Federal Reserve has forecast three new rate hikes in 2018, many investors are apprehensive about the continually soft inflation reading, as well as the coming Fed leadership change in February when Jerome Powell will be replacing Janet Yellen as Chairman.
Admittedly Powell is not seen by many as liable to diverge too drastically from the policies of Yellen, but the change in leadership nonetheless could prompt changes to the monetary policy outlook for 2018.
In other news, markets continue to appear disinterested with the recent implementation of tax reform measures, with investors seemingly split into various camps; some of the understanding that there will be a great deal of time before any positive effects on the US economy are revealed, and others of the opinion that the addition to the US deficit will negate some of the positive growth that could occur.
Pound Canadian Dollar (GBP/CAD) on Good Form Ahead of Canadian Manufacturing Report
The Pound inched ahead against the ‘Loonie’ on Tuesday, seemingly unperturbed by crude oil posting its strongest year opening since 2014.
Anti-government protests in Iran and continued OPEC supply cuts bolstered crude oil prices, leaving markets predominantly bullish.
Jeffrey Halley, Senior Market Analyst at Oanada elaborated:
‘Falling inventories globally and strong economic growth offset the restart of the Forties pipeline and the resumption of production following a pipeline outage in Libya’.
This was not enough to swing things back into the Canadian Dollar’s favour, however, with the upcoming December Canadian manufacturing PMI forecast to steady from 54.4 to 54.2 perhaps limiting demand.
Pound Australian Dollar (GBP/AUD) Continues Slide on Bullish AUD
The ‘Aussie’ Dollar opened the New Year on solid form, continuing to benefit from the largely weak US Dollar and strengthening commodity prices.
This has occurred despite some mixed domestic data releases from Australia on Monday, with December’s AiG performance of manufacturing index contracting from 57.3 to 56.2.
Looking ahead, markets are anticipating Wednesday’s AIG Services index print for December, with a drop forecast from 51.7 to 52, and Friday’s balance of trade reading.
If the US Dollar continues to remain comparatively weak, however, then its ‘Aussie’ counterpart could remain resilient to poor data releases.
Pound New Zealand Dollar (GBP/NZD) Exchange Rate Softens on Prolonged Risk Appetite
Similar to the Australian Dollar, the GBP/NZD exchange rate continues to remain limited by market risk appetite.
On the data front, the bullish New Zealand Dollar momentum seems to be unaffected by expectations that global dairy prices will imminently contract, with markets expecting a ‘wave of exportable surplus’ in the coming months to limit price growth.
Rabobank Senior Dairy Analyst Michael Harvey stated:
‘The recent growth in global milk supply, which peaked in the last quarter of 2017 with the Oceania spring peak and a return to growth in Europe is taking its toll on global commodity prices’.
Looking ahead, markets will be looking to see exactly how well the Reserve Bank of New Zealand (RBNZ) will juggle its new dual mandate; a focus on both employment and inflation and what this could mean for the monetary policy outlook for 2018.