Lingering Brexit and inflation fears weaken GBP despite strong services PMI reading

While the latest UK services PMI printed positively, markets couldn’t shake the lingering fears over the impact of inflation upon the sector and the pound mostly weakened.

Sterling is feeling a little more positive this morning. GBP/EUR has returned to trend around yesterday’s opening levels at €1.1234, while GBP/USD’s starting point at US$1.3550 is slightly higher than the previous morning. GBP/AUD is up 0.3% to AU$1.7283, GBP/NZD is flat at around NZ$1.8939, and GBP/CAD is inching up from opening levels at C$1.6944.

There is nothing much of interest on the UK data calendar today. Read on to discover the big Eurozone and US releases that will be responsible for the bulk of Sterling exchange rate movement…

What’s been happening?

The pound ended the day in negative territory versus most of its peers yesterday, although it made notable gains versus the US dollar.

December’s UK services PMI surprised with an above-forecast rise from 53.8 to 54.2, but markets weren’t too convinced that this was a positive sign.

Like most services readings since the referendum, worries about the outlook for the sector took the shine off the positive headline reading, with markets still uncertain that the industry can escape negative impacts from Brexit and rising inflation.

GBP/EUR further lost ground thanks to a slew of largely above-forecast PMIs for the Eurozone.

Overall, the PMIs showed that the private sector expanded at its fastest pace in nearly seven years, and that the currency bloc economy was on track to have expanded by a respectable 0.8% in the fourth quarter of 2017.

Meanwhile, GBP/USD was able to make solid gains, despite a run of positive US data that should have provided support for the US dollar.

The ADP employment change report for December greatly bettered forecasts, rising unexpectedly from 190,000 to 250,000 – which markets will take to mean tomorrow’s non-farm payrolls figure is also likely to post a solid uptick in job creation.

However, there were two things distracting the currency markets; the fact Federal Reserve policymakers still disagree on the inflation situation and the fact that the Dow Jones Industrial Average stock market index broke the 25,000 barrier for the first time in history.

The former kept the outlook for US monetary policy soft, while the latter incentivised investors to take a risk on the stock markets rather than buying the safer, more stable US dollar.

What's coming up?

UK data is thin on the ground today, so the pound could end the week reacting to the strength or weakness of Eurozone and US data.

Eurozone consumer price index figures are expected to show a rise in core inflation – although markets may actually sell the euro, as the rate of price growth is expected to hit just half of the official target set by the European Central Bank (ECB).

Meanwhile, US non-farm payrolls figures will have a significant impact upon the US dollar, especially if the data prints strongly enough to suggest the Federal Reserve may need to hike rates in the near-term.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Reaz Rahman
Senior Dealer

Reaz, our Senior Currency Dealer, joined us in January 2015. Reaz draws on his detailed knowledge of the foreign exchange markets to help customers to choose the right service and time to transfer.