Sterling Continues to Weaken Ahead of Thursday's Crucial Events
What’s been happening?
Pound Sterling – UK Markets
The British pound suffered heavy losses against the euro and the dollar on Tuesday as disappointing PMI data and the uncertainty surrounding Brexit continued to weigh on the currency and made it more likely for the BoE to adopt a very cautious tone in its monetary policy statement, which is scheduled to be published on Thursday. The IHS Markit reported that the service sector in the U.S. struggled to expand in January with the PMI falling to 50.1 from 51.2 in December. “Service sector growth ground almost to a halt in January, matching similar disappointing news in the manufacturing and construction sectors. The last three months have seen the economy slip into its weakest growth spell for six years, and indicate that GDP likely stagnated at the start of 2019 after eking out modest growth of just 0.1% in the fourth quarter,” said Chris Williamson, Chief Business Economist at the IHS Markit.
Meanwhile, ahead of British Prime Minister Theresa May’s critical meeting with the European Council President Donald Tusk and the European Commission President Jean-Claude Juncker, the PM’s spokesman explained that their objective was to secure legally binding changes to ensure that the UK wouldn’t be trapped indefinitely by the backstop. Additionally, PM May reiterated that they were committed to ensuring no return to a hard Irish border. Despite these comments, investors remain sceptical about PM May’s chances of convincing the EU to renegotiate the Withdrawal Agreement.
US Dollar – US Markets
With investors staying away from major European currencies, the greenback continued to find demand on Tuesday despite uninspiring macroeconomic data releases and the US Dollar Index rose to its highest level in nearly two weeks above 96.
In its latest report, the ISM announced that the Non-Manufacturing PMI in January slumped to 56.7 to fall short of the market expectation of 57.2. “The non-manufacturing sector’s growth rate cooled off in January. Respondents are concerned about the impacts of the government shutdown but remain mostly optimistic about overall business conditions,” Anthony Nieves, Chair of the Institute for Supply Management (ISM) Non-Manufacturing Business Survey Committee, noted. Similarly, the IHS Markit’s Services PMI edged down to 56.7 from 58 in December.
The final data of the day from the U.S., the IBD/TIPP Economic Optimism Index, retreated to 50.3 to miss the analysts’ estimate of 53.1. “The government shutdown helped drag the overall index lower, as confidence in federal economic policies fell to the lowest point in more than a year. The six-month economic outlook gauge also took another tumble, sliding deeper into pessimistic territory,” the publication read.
Euro – European Markets
The shared currency recorded losses against the dollar for the second straight day while preserving its strength vs the pound sterling. According to the Eurostat’s monthly report, retails sales in the euro area declined by 1.6% on a monthly basis in December following November’s 0.8% increase and dragged the annual rate down to 0.8% from 1.8%. On a positive note, the IHS Markit’s Services PMI for both the eurozone and Germany rose slightly in January. Assessing the data, “January's services survey showed conditions in Germany's labour market continuing to improve, with employment rising solidly on the month and many firms linking increasing costs to wage growth,” Phil Smith, Principal Economist at the IHS Markit said.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Wednesday.
US: Trade balance, nonfarm productivity and unit labour costs data will be published from the U.S.
EU: Factory orders from Germany will be the only data featured in the European economic docket on Wednesday.