Morning Report: 3 December 2015

3rd December 2015 By: Ranko Berich

GBP Sterling continued to fall yesterday, with fresh lows against the USD meaning sterling is now at its weakest level against the greenback since April. Sterling also suffered against the euro, falling after data from the construction industry showed a sharp downturn in the sector, hurt by the weakest expansion in housing activity since mid-2013. Although overall the 55.3 reading indicates the sector is still expanding, it was well below market expectations and added further fuel to recent data that indicates that economic growth in the UK is slowing. This morning the pound has an opportunity to redeem itself with the release of data from the service sector at 9.30am GMT, and given that the industry represents three quarters of the UK economy, it is always closely watched. Markets are expecting a tentative uptick in the reading to 55.1 from 54.9 last month, so any reading either side of this figure is likely to define sterling’s fate, at least for this morning’s trading.

EUR The euro in general weakened yesterday, with both headline and core inflation figures from the eurozone disappointing market forecasts, and underlining how fragile the euro area economy remains. With the core reading only at 0.1% on the year, the figures fuelled expectations that the European Central Bank will announce further measures to stimulate the economic bloc when they meet today. Today’s meeting has been speculated heavily on for months now, with ECB President Mario Draghi having given on several occasions indications that the bank may decide to extend its asset purchase programme even further, cut some or a variety of deposit rates, or a mixture of the two. With the market still remaining uncertain as to the exact extent or nature of the ECB’s policy announcement today, we are expecting to see extreme volatility over the course of the afternoon. The interest rate announcement itself will be made at 12.45pm, before Mario Draghi’s press conference at 1.30pm GMT.

USD The US dollar continued to strengthen overall yesterday, with Federal Reserve Chairwoman Janet Yellen settling the stage last night for the first interest rate change in seven years, when the policy-setting Federal Reserve Open Market Committee meets on December 16th. Speaking at The Economic Club in Washington DC, Yellen stated that the world’s largest economy had “recovered substantially” since the recession, with the current growth rates indicating that the labour market was heading to full employment, which should push inflation back up towards the Fed’s base target of 2%. Although Yellen is only one voting member out of twelve, and comments from other FOMC members such as Charles Evans have indicated it is unlikely to be a unanimous decision, as head of the committee Yellen’s viewpoint always holds the most weight with the market. Yellen is due to speak once again this afternoon, to the Joint Economic Committee also in Washington DC, and at 3pm GMT we will see the release of the latest Institute of Supply Management Non-Manufacturing Purchasing Managers Index, which is taken as a key gauge of the health of the US economy. The figure is expected to drop slightly to 58.1 from 59.1 last month, though nonetheless this would represent robust performance.

CAD The loonie firmed up sharply yesterday, as the Bank of Canada announced that it would be holding its key overnight lending rate at 0.5%, causing traders who had been betting in favour of a third rate cut this year to reverse their bets. The BoC did note that the country’s important resource sector continues to struggle, with deflated commodity prices and widespread job cuts meaning the outlook remained bleak. Overall inflation in the economy remains tepid, with a lack of business investment and a failure to attract enough consumer spending from the US, its biggest trading partner, being cited as key concerns. As a consequence, the loonie’s rally yesterday is likely to prove short lived.

UK News

  • Reuters. UK services growth hits four-month high, economy to pick up speed – PMI: Growth across the British services sector was at its fastest in four months in November, pointing to a stronger economic expansion in the final months of the year, a survey showed on Thursday.