05 January 2018 - USD holding just above recent lows ahead of US employment report. GBP awaits car registration numbers after EUR/USD hits fresh 3-year high
By Nick Parsons
Friday 5 January
British Pound (GBP)
After a very strong start to the New Year, the GBP has been spinning its wheels as it tries to gain traction. On Wednesday morning it reached USD1.3608; its highest since the day after the EU referendum back in June 2016. From that point on, however, it was downhill all the way and the pair tumbled more than a full cent with the pound losing ground against every one of the major currencies we track here. Yesterday, it regained around half its losses after a better than expected set of PMI services numbers and overnight in Asia has made further progress though GBP/USD at 1.3560 is still around 45 pips below the week’s best levels. The UK Services PMI Business Activity Index registered 54.2 in December, up from 53.8 in the previous month, to signal the second-fastest upturn in service sector output since April 2017. Higher levels of business activity have now been recorded for seventeen months running, supported by the resilient economic backdrop and rising consumer spending. However, service providers noted that Brexit-related uncertainty continued to hold back clients’ willingness to spend at the end of 2017. New business volumes increased at a solid pace in December, but the latest upturn was the slowest recorded since August 2016. Reports from survey respondents suggested that subdued business investment and cost consciousness among clients were factors that had weighed on sales growth in December. Today we’ll get to see new car registrations both for the month of December and the full year 2017. Contrary to perceptions about the UK car manufacturing, based on memories of the chaos in the 1970’s and subsequent decline, the automotive industry is one of the economy’s key sectors. It employs more than 800,000 people, 165,000 in manufacturing. The Treasury is dependent on a healthy new car market, relying on £5.5 billion in annual revenues from vehicle excise duty and even more from VAT on sales. The market expects new car registrations around 2.55m; a 5.6% drop from 2016 levels. Ahead of thse numbers, the GBP opens in Europe this morning at USD1.3560 with GBP/AUD at 1.7290 and GBP/NZD1.8960.
US Dollar (USD)
USD/GBP expected range: 1.3500 – 1.3610
The good news for the US Dollar is that it didn’t make a fresh low yesterday! On Tuesday its index against a basket of major currencies hit a low of just 91.44 but then on Wednesday following strong ISM data and after the FOMC Minutes were published, it managed to reach 91.92. On Thursday it began to turn lower once more and in the London afternoon it slipped back to a low of just 91.49. Overnight in Asia it has risen very marginally to 91.60. The big story of the day in the United States was further strength in the economic numbers and yet another record high for stock markets. The Dow Jones Industrial Average jumped past 25,000 for the first time on Thursday morning, on track to make the fastest run ever to a fresh 1000-point milestone. If the DJIA closes above 25,000, the jump from 24,000 would have taken 23 trading days, ahead of the 24-day spans that took the index to 11,000 in 1999 and 21,000 in March last year. On the economy, the latest ADP employment report was much stronger than consensus expectations, showing 250,000 jobs were created in December against forecasts of a more modest, but still impressive, 190,000 gain. ADP’s Press released noted, “Throughout the year there was significant growth in services except for an overall loss of jobs in the shrinking information sector. Looking at company size, small businesses finished out 2017 on a high note adding more than double their monthly average for the past six months. The job market ended the year strongly. Robust Christmas sales prompted retailers and delivery services to add to their payrolls. The tight labor market will get even tighter, raising the specter that it will overheat.” Today brings the official labour market report as well as the ISM services index and November’s trade balance. The US Dollar index opens in Europe this morning at 91.60; barely 15 pips above its recent low.
European Euro (EUR)
GBP/EUR expected range: 1.1210 – 1.1295
The euro was Thursday’s second-strongest currency after the New Zealand Dollar. Having reached a more than 3-year high of USD1.2077 on Tuesday, then slipped steadily on Wednesday, yesterday it rallied to a fresh cycle high of 1.2082 after publication of the Eurozone aggregate and individual countries’ PMI services reports. Overnight in Asia it has traded broadly sideways against the USD in a very tight range from 1.2067 to 1.2077. The final Eurozone PMI Composite Index posted 58.1 in December, up from 57.5 in November, to register its highest reading since February 2011. The headline index has signalled growth for 54 successive months, with the average level during quarter four the best since the opening quarter of 2011. The trend in new business also strengthened in December. Manufacturers saw the steepest increase since April 2000, underpinned by improved domestic demand and near-record growth in new export orders. Service providers, meanwhile, registered the fastest increase in new work for over a decade. The positive economic environment led to improved business confidence in the euro area. Optimism rose to its best since September, after strengthening to a joint-record high in Germany and three-month highs in France, Spain and Ireland. We said yesterday that “whilst the German data are very impressive, they have rather lost their power to surprise on the upside, given that expectations are already so elevated.” Nonetheless, the Markit Press Release was remarkably upbeat, saying, “A stellar end to 2017 for the eurozone rounded off the best year for over a decade, continuing to confound widely-held fears that rising political uncertainty would curb economic growth… Manufacturing is enjoying its best growth spell since data were first collected over two decades ago while the service sector closed off its best year since 2007.” The language is enough to melt the heart of even a hardened trader !! The EUR opens in London this Friday morning at USD1.2065, with GBP/EUR at 1.1240.
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