Sterling soars to near one month high against broadly weaker Dollar

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6 September 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling jumped by almost one percent for the day against the US Dollar on Tuesday, with another broad based sell-off in the greenback sending the Pound to its strongest position in almost a month.

he US Dollar remained under heavy selling pressure yesterday after comments from Federal Reserve policymaker Lael Brainard suggested that the central bank in the US may be cautious about raising interest rates again this year.

Fed Governor Brainard sounded a very dovish note by voicing concern over recent low inflation, claiming that it may be prudent for the FOMC to raise interest rates more gradually than the central bank’s median forecast. While Brainard, a voting member of the Fed’s monetary policy committee, has already make clear her view of a slower path of hikes, investors saw her comments as another opportunity to sell the already fragile greenback.

Economic news out of the UK was actually fairly disappointing, although investors almost completely overlooked it in favour of developments abroad. The latest services PMI from Markit underwhelmed expectations, falling more than expected to 53.2 from 53.8 (Figure 1), its lowest level in eleven months. While the slowdown was relatively small in nature, the fact that the sector accounts for around 75% of overall output in the UK has investors concerned that overall growth could prove modest again in the third quarter.

Figure 1: UK PMIs (2014 – 2017)

Eurozone service growth revised down, Aussie Dollar jumps

The Euro ended London trading only modestly higher against the US Dollar, and was actually one of the worst performing major currencies against the greenback. Yesterday’s business activity services PMI was unexpectedly revised downwards, which can be attributed to much of the softness in the single currency. The index came in at 54.7 versus the 54.9 previous estimate, albeit remaining robust and suggesting that the Eurozone economy is on course to expand at a blistering pace yet again in the second quarter.

Retail sales were also a slight disappointment. However, with traders now fully focused on tomorrow’s European Central Bank meeting, the data mostly went unnoticed. Investors are largely viewing EUR/USD as a profit taking opportunity ahead of tomorrow’s meeting, in which President Mario Draghi is now not expected to announce a tapering in the large scale quantitative easing programme. As we outlined earlier in the week, we think that risks to the Euro are skewed to the downside ahead of the meeting.

Elsewhere, the New Zealand and Australian Dollar’s ended trading as just about the two best performing currencies in the world. The Aussie got a significant boost from the Reserve Bank of Australia, which kept its interest rates on hold and reaffirmed its neutral policy stance that made another rate cut more and more unlikely.