UK Services PMI Unexpectedly Weakens

An unexpectedly weak services PMI report at home points towards obstacles that might hinder the UK economic recovery, although both manufacturing and services PMIs remain firmly in the expansion zone. Against the backdrop of the latest weak data, it remains to be seen whether the BoE will make a statement on its interest rate guidance in the policy meeting tomorrow, especially in the wake of Mark Carney’s comments hinting at a possible shift in guidance. In the Euro zone, the just out disappointing services PMI reports and the persistently weak inflation numbers have raised prospects of a potential loosening in stance by the ECB tomorrow. In the US, markets will view today’s ADP employment print as a precursor to Friday’s all important non-farm payrolls report.

Pound Sterling – UK Markets

Coming on the heels of downbeat manufacturing data earlier in the week, the just released services PMI report for January has shown that expansion in the dominant British services sector eased for January, pointing towards a weak start to 2014. The unexpectedly weak services PMI print has dampened market sentiment towards the Pound, weakening the currency against the majors this morning. However, data released earlier in the day revealed that British retailers slashed prices at the fastest rate since at least 2006, pointing towards reduced consumer spending which may reflect in the nation’s January retail sales report. Meanwhile, Sterling erased its early morning losses against the greenback yesterday following the release of unexpectedly upbeat domestic construction PMI print for January. The UK construction sector activity expanded at the fastest pace since August 2007, highlighting that the housing market continues to grow from strength to strength. Against the backdrop of largely positive economic data and hints offered by Mark Carney about possible alteration to forward guidance, tomorrow’s BoE monetary policy meeting will attract considerable attention from Sterling investors.

US Dollar – US Markets

The US Dollar searched for direction against the single currency yesterday, tracking both domestic and European economic data. Factory orders in the US expectedly dropped for December, although the decline was less than analysts’ expectations, but nonetheless highlighted the troubles of the industrial sector in the world’s largest economy. Meanwhile, Richmond Fed President, Jeffrey Lacker, opined that despite the modest pace of domestic economic growth, the central bank is expected to continue tapering its asset purchases programme. Additionally, highlighting the central bank’s inability to raise interest rates in the near future, Charles Evans, the Chicago Fed President, stated that given the low inflation and still high unemployment, any rise in rates will be a “poor choice” at this time and may hurt the nation’s economy. The greenback has moved higher against the majors this morning following the release of downbeat European economic data earlier today. Ahead of Friday’s non-farm payrolls report, today’s ADP employment report will be will be keenly followed by investors for cues about the nation’s labour market conditions. The ISM non-manufacturing PMI report and speeches by Fed policymakers will also influence trading sentiment in currency markets in the session ahead.

Euro – European Markets

Kicking off today’s trading session, the mixed services PMI numbers across European economies still points to a subdued prospects for the sector and has pressurised the common currency against the US Dollar. Risk appetite continued to struggle against the backdrop of mixed set of economic data recently. Additionally, low consumer price inflation continues to pose immense challenge for the ECB and what measures the central bank takes in its policy meeting tomorrow to tackle the issue will be closely scrutinised by market participants. Meanwhile, the Euro traded in a tight range against the US Dollar yesterday as mixed domestic economic data failed to offer upside traction to the common currency against the latter. The Spanish labour market reversed its gains from the past two months as the number of unemployed people in Spain rose sharply for January. However, producer prices in the Euro zone rose more than forecasts for December, momentarily lifting the currency against the greenback yesterday. Later today, investors will keep a tab on the Euro zone retail sales print, which is likely to show a slight dip in sales for December.

Other Currencies – Highlights

The New Zealand Dollar gave up its early morning gains and has weakened sharply against the majors in today’s trading session as “risk-off” sentiment continues to weigh on high-yield assets following the Fed’s QE3 tapering decision last week. Earlier today, the upbeat domestic fourth quarter employment report had lifted the Kiwi Dollar against the majors, highlighting the strength in the nation’s labour market during the final quarter of last year. The buoyant employment print has added to recent signs of a pick-up in domestic economic recovery and has boosted expectations of an interest rate hike by the RBNZ in the near term. With little of note on the domestic macro front in the week ahead, news flows emanating from both sides of the Atlantic will prove crucial for the New Zealand Dollar against the majors in the near term. Additionally, investors in the Kiwi Dollar will keenly follow Chinese economic data due later this week for further direction.