UK Services Growth Surprisingly Picks Up in January
A number of key economic reports are scheduled for the day, amongst which the just published UK Services PMI index ticked unexpectedly higher for January, suggesting that the dominant services sector will continue to be the major growth driver in the UK economy. A surprise advance in both the manufacturing and services sector are likely to make Sterling investors more optimistic about the Bank of England’s (BoE) quarterly forecasts scheduled tomorrow.
Moving ahead, Euro area retail sales data will be in focus amid expectations of a modest recovery on the back of a drop in oil prices. Across the Atlantic, services PMI and the ADP employment report due later in the day will be closely watched.
Pound Sterling – UK Markets
The Pound retreated against the US Dollar yesterday following the publication of the UK’s construction PMI data which showed that output growth eased in January to a nine-month low, disappointing market expectations of a robust reading. In contrast, earlier this week the UK’s manufacturing PMI was surprisingly stronger than expected. Also, the key PMI print that was released just now revealed an unexpected small pick-up in the UK’s dominant services sector and an increase in new business at the sharpest rate since last July which could help push up the rate of economic growth in the first quarter of 2016. Sterling has strongly recovered from its earlier losses against the greenback post the release of services PMI data, which surprised markets who had anticipated some softness from the December numbers.
Looking ahead, market attention will gradually shift towards to the BoE for “Super Thursday”. Although the central bank is not expected to make any changes to the monetary policy, investors will watch out for any signals from the UK Governor, Mark Carney, when he presents the central bank’s latest economic forecasts tomorrow.
US Dollar – US Markets
The US Dollar is trading in a close range against the Euro this morning. Today, the ISM and Markit’s Service PMI numbers in the US will be widely watched, as investors look for fresh evidence on whether the nation’s economic growth is still humming. However, the service activity in recent months has been a little softer, raising concern about growth in the US economy. Also, in focus will be ADP employment data ahead of a slew of jobs data before the weekend.
The greenback traded lower against most of the major currencies yesterday amid persistent concerns over global economic growth and as oil prices resumed their downward trend. Kansas Federal Reserve (Fed) President, Esther George, expressed confidence that a pickup in economic growth, steady job gains and modestly higher rates of inflation will guarantee a further rate rise. However, this followed comments by the Fed Vice Chairman, Stanley Fischer, who stated that US Fed’s next interest rate move would be difficult to predict. In economic news, the ISM New York business conditions in January expanded at the slowest pace in four months.
Euro – European Markets
The Euro has currently trimmed part of its earlier gains and is trading on a weaker footing against the Pound. On the macroeconomic front, market participants earlier in the day turned their attention towards a string of services and composite PMI data in the Euro zone and its peripheries. According to the final PMI survey report, private sector activity in the Euro zone economy slowed at the start of 2016, with the services sector expanding albeit at a slower pace in January. However, the January reading still signals a rate of expansion that is broadly in line with the Euro zone’s modest economic growth performance since mid-2013. But persistent concerns of a slowdown in China and other large developing economies are a threat to the wider Euro area recovery. Meanwhile, activity in the service sector rebounded last month in France, after contracting in December.
Looking ahead, today’s update on Euro zone retail spending will provide further insights for deciding whether macro improvement is still on the cards in the near term. Data is expected to bring in some relief from weakness seen in the consumer sector since September last year.
Other Currencies – Highlights
The Japanese Yen is trading on a stronger footing against the US Dollar today. Earlier, the minutes of the Bank of Japan’s (BoJ) monetary policy meeting in December indicated that the members were in agreement that there was no need to shift the policy as they noted that the underlying trend inflation was steadily improving. At its most recent policy meeting last week, the central bank surprised markets by setting negative interest rates for the first time. Following the release of the meeting minutes, the BoJ Governor, Haruhiko Kuroda, stated in his speech that the central bank is prepared to cut interest rates further into negative territory and has enough room to ramp up the easing measures to meet its 2% inflation target. Meanwhile, markets shrugged off Japan’s PMI services data that rose at its fastest pace in nineteen months for January as demand picked up.
In the absence of further macroeconomic indicators in Japan, investors today will keep a tab on the private non-farm payrolls and non-manufacturing ISM data in the US for further direction.