Sterling Stubborn After Good Economic News
The Pound rose after the release of the UK Services Purchasing Managers’ Index (PMI) which showed that the UK service sector has hit a 4-month high. Today’s report comes on the heels of better than expected PMIs in construction and manufacturing, and, taken as a whole, they show the UK economy is still in robust good health.
The US Dollar is rising on yesterday’s confident statement from the US Federal Reserve (Fed) that dismissed any concerns that the US economy is slowing down. The US Dollar can be expected to rise steadily all month because of the 93% chance that the Fed will raise interest rates in June.
Pound Sterling – UK Markets
On Thursday, due to the Federal Reserve’s positive monetary policy statement, the Pound to US Dollar exchange rate fell to $1.285, having reached $1.294 earlier. It was lifted again, just below $1.29, after the release of the UK’s Services PMI.
The UK Services PMI, released this morning, shows that Britain’s service sector is growing, hitting a four-month high. It has jumped to 55.8 in April, from 55.0 in March, and is the higher reading from this year. The key findings show a rise in business activity since December 2016, an increase in new work and employment levels, and the fastest increase in average prices charged since July 2008. The increase in prices is hitting consumers, but firms argue that the increase is due to the higher costs they faced in April.
The UK services PMI measures the activity level of purchasing managers in the services sector. Any reading above 50 shows that the sector has expanded, while any reading below 50 indicates contraction. A higher than expected reading is always considered positive for the Pound. The survey is a useful indicator of overall economic performance for purchasing managers who usually have early access to data about their company’s performance.
The UK car registration figures were also out this morning, but didn’t do very well. They dropped by a 20% in April because of the introduction of the new vehicle excise duty rules which made running certain cars very expensive. This included a 28% drop in private car sales that shows limited consumer spending.
Unlike April’s negative UK car sales, British new car registrations rose by 8.4% year-on-year to a record high of 562,337 vehicles in March 2017, after consumers were buying their cars before the new vehicle excise duty (VED) came into force in 1 April for the most polluting cars. There was an increase in demand for alternatively fuelled cars such as hybrids or battery vehicles.
HSBC Holdings Plc, Europe and Britain’s biggest bank, reported Thursday, that it had a drop in its pre-tax profit due to changes in accounting treatment of the fair value of its debt. It saw its profit before tax fall 19% to £3.88bn ($5bn) in the first three months of 2017. Compared to last year, the bank also had a 19.5% drop in year-on-year net profit, falling to £2.56bn. According to the HSBC group chief executive Stuart Gulliver, the adjusted pre-tax profit rising to $4.61bn from $4.12bn a year earlier, is considered a “good set of results.” HSBC shares were up almost 3% this morning.
On a lighter note, the Daily Mail reported that the Queen called her household to a “highly unusual” emergency meeting at Buckingham Palace today. As it was revealed later in a statement, her husband, the Duke of Edinburgh will retire from carrying out any official duties beginning from this Autumn. The Queen turned 91 last month and Prince Philip will be 96 next month.
US Dollar – US Markets
The US Dollar was higher against the Pound and the Euro, after expectations that the Federal Reserve (Fed) will raise interest rates in June. It will possibly continue to rise when Friday’s non-farm payrolls report is released, since the Fed’s optimism has given investors certainty that the labour market is strong.
America’s central bank gave a positive outlook for the US economy in its May meeting last night, stressing that employment statistics and rising business investment were encouraging. It has left interest rates unchanged for now and predicted that slow economic growth is just “transitory”.
The focus today will be the health care vote in the US Congress and US payrolls and Fed speakers, tomorrow. Ahead of the vote, US Treasuries will be driven by general risk sentiment.
Top Republicans are confident that their bill to repeal and replace Obamacare will pass, giving President Donald Trump an important legislative victory. The Republican bill will discard the many protections of Obama’s Affordable Care Act and is believed to leave 24 million fewer people insured by 2026 than under Obamacare.
If the vote is passed, focus can shift to tax reforms after the recess. It is considered to be positive for the reflation trade (negative US Treasuries).
Today’s US economic calendar also includes, among others, the release of jobless claims, Prelim Nonfarm Productivity and Unit Labour Costs for the first quarter of 2017.
Euro – European Markets
The news of the Euro economic area’s growth, boosted the single currency against the US Dollar. It was up to $1.09 after it fell to $1.08 earlier in the morning. This morning, Markit released its report on the overall market performance in the Eurozone – Composite PMI. According to the survey, Eurozone growth hit a six-year high, rising from 56.4 in March to 56.8 in April. Spain’s service sector growth hit a 20-month high jumping to 57.3, while Ireland is on the top with 58.7. Germany and France’s service sectors slowed down to a 2-month low.
The markets are uneasy prior to the final round of the French presidential elections at the end of this week. A lot was expected from the last debate between the two candidates – Emmanuel Macron and Marine Le Pen. However, despite their fierce battle in front of cameras, trying to attract more voters, the electors seemed to have made up their minds and the latest polls stayed almost unchanged – 59% support for Macron and 41% for Le Pen. But it isn’t over yet, and before the final results on Sunday, the European forex markets will stay alert.
Other Currencies – Highlights
The Australian Dollar has been under pressure against Sterling since March and, despite minor growth, is still weak. Today, the Pound is exchanging at 1.73 AUD, a level last time seen in September 2016. The value of the Aussie currency depends vastly on commodity prices which are currently dropping. Iron ore – Australia’s main export product - has just slid down 7% in the Chinese exchange market, while rubber and palm oil are down 5.5% and 1.2%, respectively.
Economists are expecting a volatile day for the Pound/New Zealand Dollar pair. The NZD surged on yesterday’s markets after the news of a decrease in the country’s unemployment rate, but, this morning, Sterling gained back some ground, rising up 0.5% and is currently at 1.87 NZD. According to economic experts, the Pound will continue to trade between 1.92-1.93 NZD in the next few weeks.