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Cable Stumbles as Services Growth Cools

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Top Stories

  • Eurozone final services PMI revised lower to 55.8 from 56.0
  • UK PMI Services misses badly at 53.1 vs.54.5 eyed
  • Nikkei drops -2% on yen strength, Europe lower by -0.5%
  • Oil drops below $82/bbl
  • Gold rises to $1194/oz.

Overnight Eco

  • AUD AIG Services Index 46.6 vs. 48.8
  • AUD Trade Balance 3.54B vs. 1.81B
  • AUD HPI q/q 3.1% vs. 2.0%
  • EUR Final Services PMI 55.8 vs. 56.0
  • EUR Retail Sales m/m 0.0% vs. 0.0%
  • GBP BRC Shop Price Index y/y 1.5% vs. 1.5%
  • GBP Services PMI 53.1 vs. 54.5

Event Risk on Tap

  • USD Challenger Job Cuts y/y
  • USD ADP Non-Farm Employment Change expected at 36K
  • USD ISM Non-Manufacturing PMI expected at 53.3

Price Action

  • USD/JPY comes close to 85.00 as 15 year high approaches
  • AUD/USD better Trade data keeps it above .9100
  • GBP/USD falls through 1.5900 as PMI services prints weaker
  • EUR/USD drops below 1.3200 as revison in PMI services, profit taking weighs

With the exception of the yen which appears to be unstoppable in its run towards a test of the 85.00 level, the dollar was higher across the board in early European trade as a combination of profit taking and weaker than expected economic data from the region pushed high beta currencies lower. The EUR/USD fell through the 1.3200 figure after final services PMI data printed worse than the initial flash reading while cable dropped through 1.5900 in the wake of a miss in UK services PMI report.

UK services PMI came in at 53.1 versus forecast of 54.4 its worst reading in 12 months. Both output and new orders subcomponents grew at slower rates with government demand weakening notably. The Markit/CIPS press release particularly noted that ,"There were a number of reports of weak demand from the public sector, with contracts cancelled and business opportunities lower. "

We have long argued that the fiscal deficit reduction programs that will be put into effect by the new government over the next several months are likely to create a very serious challenge for UK economic growth going forward. Today's dip in the PMI Services report may be a preview of things to come and we would not be surprised to see the index slip below the 50 boom/bust level over the next several months as the budget cuts take full effect depressing demand in UK even more.

Cable fell in the aftermath of the report probing support at the 1.5900 level. Prior to the release, currency traders were gearing up for a test of the 1.6000 figure, and the unit may yet make a run towards that level if US data proves weaker than expected fueling even more speculation about possible fresh rounds of QE from the Fed. However, with the pound now rising solely on anti-dollar flows alone rather than any improving fundamentals, we believe that any further progress beyond 1.6000 will be limited as traders become increasingly concerned about UK growth prospects in the second half of the year.

In North America today the key event risk for the market will be the ISM Non-Manufacturing report due at 14:00 GMT. Traders anticipate a slight decline to 53.3 from 53.8 but if the number misses to the downside, the buck could see further selling pressure as expectations about Fed easing will rise to a fever pitch. USD/JPY is within striking distance of the 85.00 handle and if the data prints weaker than expected the temptation to run stops at that psychologically key level will be very high. A breach of 85.00 will open the way for a test of 15 year lows in the pair at the 80.00 level as markets begin to price in a protracted slowdown in US economic growth.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 11:30 7:30 Challenger Job Cuts y/y -47.1%
USD 12:15 8:15 ADP Non-Farm Employment Change 36K 13K
USD 14:00 10:00 ISM Non-Manufacturing PMI 53.3 53.8

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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