UK service sector recovery lifts pound vs euro, US dollar ahead

  • UK service sector recovery lifts pound vs euro, US dollar ahead of BoE decision

    The appeal of the pound proved muted as investors continued to weigh up the odds of the Bank of England (BoE) cutting interest rates at its January meeting.

    Weaker German business sentiment signals put pressure on the euro, meanwhile, as confidence in the health of the Eurozone’s powerhouse economy weakened.

    As political pressure on the Federal Reserve increased the US dollar struggled to gain any significant ground against its rivals, in spite of a general uptick in market risk aversion.

     

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    What’s been happening?

    Dovish comments from BoE Governor Mark Carney and other policymakers had encouraged markets to price in high odds of a January interest rate cut.

    However, an unexpectedly improved UK services PMI led investors to reassess the likelihood of imminent policy easing, to the benefit of the pound.

    As the services PMI jumped from 50.7 to 52.4, signalling expansion for the sector, this fuelled hopes that the UK economy could rebound in the first quarter.

    An uneventful European Central Bank (ECB) policy announcement offered little support to the euro, meanwhile, as policy looks set to remain on hold for the foreseeable future.

    With policymakers acknowledging some anxiety over the outlook of the Eurozone economy the single currency struggled to gain any positive footing against its rivals.

    The Trump administration’s latest criticism of the Federal Reserve failed to keep the US dollar under pressure for long, as the central bank looks set to hold its ground.

    Another underwhelming month of industrial and manufacturing production put a dampener on USD exchange rates, though, with the world’s largest economy showing signs of slowing.

    Higher levels of market risk aversion helped to limit the potential for US dollar losses, however, thanks to fresh US threats to impose tariffs on EU produce.

     

    What do you need to look out for? (8 pointers)

    If the BoE opts to leave interest rates on hold at its January meeting the pound could make further gains across the board, even though the odds of a future rate cut are likely to remain.

    As markets have already unwound some of their earlier pricing of a rate cut, though, the positive impact of a rate hold could prove limited.

    Anxiety over Brexit may put GBP exchange rates under pressure in the weeks ahead, meanwhile, as long as clarity over the future relationship between the UK and EU remains lacking.

    Confirmation that the UK services PMI strengthened may also offer support to the pound, with evidence of greater economic resilience likely to encourage investors.

    Any fresh signs of slowdown in the fourth quarter Eurozone gross domestic product could weigh heavily on the euro.

    With global trade tensions looking set to persist for some time yet to come any loss of momentum for the currency union may drag EUR exchange rates lower across the board.

    As the Federal Reserve is expected to remain on hold this month the US dollar may see little movement in the wake of the announcement.

    However, any evidence of manufacturing sector weakness could put a dampener on the US dollar as the impact of trade tensions with China continue to be felt.

     

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