Sterling Falls a Bit – 5th May 2016

Sterling Falls a Bit

The idea behind Central Banks dropping interest rates into negative territory is to discourage savings and encourage spending. One could also argue that it should devalue the currency. That is the theory anyway. The ECB though has reason to be concerned that things are not working out as it had hoped. So far this year the Euro has strengthened by 7% against Sterling and by 5% against the US Dollar. Not helpful statistics when the ECB is struggling to drag inflation up from -0.2% to +2.0%.

The Euro missed out on the top slot yesterday but it still managed to move a quarter of a cent higher against Sterling. That did not come as a particular surprise but it was fascinating to see the US Dollar, the Swiss Franc, the Japanese Yen, the Australian Dollar, the Swedish Krona and the Norwegian Krone all making identical 0.2% gains against Sterling. Basically, Sterling fell a bit everywhere and nothing else happened.

Among yesterday’s dozen or so services sector purchasing managers’ indices only three beat forecast and only three were higher on the month. The lack of sparkle added to investors’ concerns about global growth and weighed on equity and commodity prices. The SA Rand took the biggest hit for a second day. Normally, that mood would have led to some sort of flight to safety, with investors abandoning the “risky” commodity currencies and embracing the “safe” Yen and Euro. Although the South African Rand and the Canadian Dollar were the two weakest performers it did not quite work like than on Wednesday. The Yen, the Euro and the Aussie were unchanged on the day against one another while the NZ Dollar put in the top performance, adding nearly a cent.

Sterling’s case was not helped by another disappointing PMI, this one from the construction sector. The reading fell two points short of forecast at 52.0. The next challenge for Sterling is the third PMI number of the week from the services sector. Services account for 80% of the UK economy so if the number falls appreciably short of the forecast 53.5 Sterling will have something to worry about.

The biggest data event of the week comes tomorrow, with the North American employment numbers. US non-farm payrolls are expected to be up by 200k. The change in average earnings will be watched at least as closely