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Sterling Holds Steady Despite Weakest Data In 3 Years

Sterling Holds Steady Despite Weakest Data In 3 Years

Market Drivers for March 03, 2016

  • UK Services grow at slowest rate in 3 years
  • AUD: Jan Trade data better
  • Nikkei 1.28% DAX 0.04%
  • Oil $35/bbl
  • Gold $1242/oz

Europe and AsiaAUD: Trade Balance -2.9B vs. -3.2BGBP: UK PMI Services 52.7 vs. 55.1EUR: Retail Sales 0.4% vs. 0.1%

North AmericaUSD: Weekly Jobless 8:30USD: ISM Non- Manufacturing 10:00

The UK Services sector grew at the slowest pace in 3 years, but the surprisingly weak readings had no impact on cable which continued its recovery holding comfortably above the 1.4000 level.

UK PMI Services came in at 52.7 versus 55.1, its worst reading since April of 2013 as growth in the biggest sector of the UK economy slowed markedly. New orders fell to the lowest level in 3 years and inflation readings remained low. Overall, this has been one of the worst performance weeks for UK economy in months as all three PMI gauges showed serious declines. Nevertheless the three indices remain above the key 50 boom/bust level indicating that UK economy continues to expand albeit at a much slower pace than the market anticipated.

The news bodes badly for Q2 GDP with analysts likely to lower forecasts as demand has clearly dampened. Still, for all intents and purposes, sterling ignored the data as it held well above the 1.4000 level in mid morning London dealing. After the relentless selloff of the past month, cable is so grossly oversold that bad economic data may not have much impact on the pair. The pound has been largely sold on fears of Brexit and for now it appears that those fears have eased as the ‘Leave’ vote has not picked up any more momentum.

Whether the UK stays or leaves the European Union remains to be seen, but for now the currency market seems to believe that cooler heads will prevail and the relentless selling of cable has ceased. Yet even if the threat of Brexit passes, the economic damage may have already been done, as this week’s data clearly shows. The slowdown in the UK economy is unlikely to reverse quickly and that means whatever short covering bounce cable sees at the moment, it will run out of gas at the 1.4200 -1.4300 range.

Elsewhere, data in Europe was slightly better with Retail Sales coming in at 2.00% vs. 1.3% on a year-over-year basis, but EUR/USD remains contained to the 1.09-1.0800 range that it’s been stuck in all week. The pair is just treading water until the ECB meeting next week as the market tries to get guidance from Mr. Draghi and company.

In North America today the focus will be on the ISM Non-Manufacturing report and more importantly its employment component which tends to be a good forecaster of the NFPs due tomorrow. The forecast is for a slight decline to 53.1 from 53.5 the month prior, but if the ISM data can surprise to the upside—as the Manufacturing report did yesterday—then USD/JPY could make another run at the 114.50 level.

So far the 114.50-115 corridor has proven to be solid resistance in the pair’s recovery off its lows, but with US data now surprising to the upside, market sentiment may shift as traders once again begin to anticipate Fed tightening. With US economic momentum beating expectations, USD/JPY may have further to run.

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