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GBP/USD drops below 1.37 on soft manufacturing data.

By Nick Parsons

Sterling’s decent has continued this morning as latest HIS Markit/CIPS Manufacturing PMI numbers missed target pushing cable below 1.37 for the first time since early January. The report came in at 53.9 a 17 month low for a sector which had held up well since the Brexit vote, aided by sterling’s fall in value after the referendum. The report’s authors advised “While adverse weather was partly to blame in February and March, there are no excuses for April’s disappointing performance, making the chances of a near term interest hike in interest rates by the Bank of England look increasingly remote.”

The dollar’s advance continues unabated as benchmark 10 year Treasury yields remain around the 3% handle adding support to the greenback. EUR/USD is currently falling to the 1.20 handle with USD/JPY rising up towards 110. The next week and a half will be crucial for dollar sentiment with the FOMC meeting today/tomorrow ahead of tomorrow’s rate decision and statement. Friday sees wage growth and jobs numbers ahead of next week’s CPI reading which should help give further clarity over whether the Fed will decide to raise rates three or four times this year. The dollar also seems to have gained on the back of reports that US President, Donald Trump has delayed the implementation of tariffs on steel and aluminium imports from Mexico, Canada and the EU. As mentioned earlier cable is lower on more soggy domestic data.

Today is Labour Day throughout Europe with most of the continent enjoying a public holiday. Lower liquidity levels on the back of the day off appear to have accentuated cables move lower and the dollar’s gains this morning. Thursday sees Flash CPI readings from the Eurozone with the headline number expected to hold at 1.3% and the core number expected to drop to 0.9%. With inflation persistently under target the question remains what taper will be announced by the ECB at their June meeting, will they stop altogether or decide to extend for 3-6 months at a lower level? Recent slowdowns in EZ activity and dollar strength may mean policy makers make less of a reference to the EUR/USD exchange rate as we near Junes crucial get together.

Having capitulated versus a rampaging US Dollar last week the bumpy ride continued for the Australian dollar yesterday which succumbed to selling pressures on approaches towards the 0.7580 mark. Providing some support early in the piece, numbers from China yesterday showed manufacturing conditions had slightly eased in April.

Whilst ongoing fears of trade battles between two of the world’s largest economics, The United States and China continue to sit front and centre of investor’s mindsets, slowing export order growth last month still wasn’t enough to signal a broader contraction in the metric which is closely tied to a barometer of underlying business conditions.

In moving into the first day of the new month, the economic calendar remains littered with top-tier macro events with The Reserve Bank of Australia kick starting proceedings today. Despite the fact policy makers are widely expect to retain the official cash rate, at a record low of 1.5 percent for a 19th consecutive month, market participants are bracing for higher liquidity through-out the course of today’s session. Opening in a softer position versus the Greenback at a rate of 0.7533, the AUD is equally well supported this morning versus both the Kiwi (1.7025) and the Sterling (0.5470).

Today sees monthly growth figures from Canada and a speech from the Bank of Canada head, Stephen Poloz in Yellowknife. The dollar’s advance has seen USD/CAD rally from around 1.25 to close to 1.29 over the past fortnight however we are well below the 1.31 level seen in March. GBP/CAD is at 1.76.

The New Zealand Dollar continued its decline overnight as we look to test December ’17 lows. Opening the week just under the 0.71 cent handle against the USD dollar, the Kiwi was hindered mid-morning after the release of ANZ Business confidence levels. A net reading of 23% of all businesses in New Zealand were discouraged about the year ahead for the local economy. The biggest dip was the construction sector whereby the residential intentions dropped from +33% to +9%.

The intraday low hit 0.7065 shortly after the release before a solid rally at the close of business all losses paired in a meagre 25 point range for the domestic session. Unfortunately there was no such recovery in overnight markets as the US dollar run continued its bullish canter. The New Zealand dollar hit an eventual low overnight of 0.7030 in the North American session and opens this morning at 0.7035 as we await the latest Building consents figures.