As we entered the new year, sterling ended a turbulent week on the up against both the euro and the dollar after a wave of data across the continent and the pond was released. The pound finished the week over 0.5 cents higher (1.1360) than where it started (1.1290) against the euro and at similar levels to where it started (1.2060) against the dollar. The pound managed to recover over 2 cents alone against the greenback on Friday after early week losses.
The cause for sterling’s recovery after the new year on Friday came from the U.S ISM Services PMI read at 49.6 in December, 5.4 points below the reading of 55 that the market was expecting and a significant drop from November’s 56.5. The ISM or Institute for supply management services PMI measures the change in production levels across the U.S economy.
Any score below 50 shows a contraction in the largest sector of the U.S economy. If this drops below 50 creates expectations of an economic slowdown to take hold in the coming months for the states. Viraj Patel (Strategist) of Vanda Research states “US Services was one of the last shoes to drop before a recession. That shoe has now dropped”, meaning that the end of the interest rate hikes from the Federal Reserve are now expected.
Thus, giving investors a pro-risk outlook in their trading. Pro-risk is positive news for the pound; the pound benefits from markets rising and after this data release stock markets rebounded giving sterling the support it needed to make up for the weeks earlier losses.
The ISM report capped off a data heavy week for the dollar and the Federal reserve, with the labour market data and non-farm payroll figures also being of significant note.
Non-farm payroll data showed a positive figure of 223k more jobs being added, up from the expected 200k and a drop in unemployment rates to 3.5%. The expectation of another 50-basis point hike by the Fed has now moved to 25 in February.
Previously the European Central Bank warned that in the new year two more 50 basis points hikes were to come after December’s meeting, providing a 3-cent shift in the euros favour over the Christmas period. This trend of weakness was extended earlier in the week when core CPI data for the bloc came out at 5.2% year on year in December, up 0.2% from November.
This underpins December’s message from the ECB that the eurozone was not done with their inflation tapering strategy. Due to this we saw GBP/EUR fall to near its lowest levels since shortly after September’s disastrous mini budget falling to a low point of 1.1280.
Following Friday’s recovery can sterling break back above the 1.21 mark against the dollar and 1.14 against the euro?
The week coming, 9th January is a less data heavy week for the dollar and the euro but a more significant one for the pound towards the end of the week, with Friday brining Growth figures along with Industrial and Manufacturing production too.
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