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Sterling under pressure ahead of UK Construction PMI and FOMC rate decision.

By Jake Trask

GBP/USD took another leg lower yesterday as poor manufacturing data indicated the economy’s poor showing in the first quarter may have split over to Q2. The Markit/CIPS Manufacturing PMI for April came in at 53.9 its worst reading since December 2016 with the report highlighting that inflationary pressures are starting to wane. With a slowing economy and inflation falling faster than expected according to recent CPI numbers the pound has tanked against the dollar dropping around seven cents since April 17th. Today sees UK Construction PMI and more Brexit debate in parliament ahead of tomorrow’s closely watched Services PMI number. Sterling has pared some of its losses this morning rising back above the 1.36 handle however its outlook has changed considerably over recent weeks so we should expect the mid to high 1.30s likely to be the new norm for the time being.

The dollar has been on a tear of late however its rally ran out of steam as it briefly dipped below 1.20 against the euro for the first time since early January. It has since retraced back above the big number as markets await tonight’s key rate decision from the Federal Open Market Committee. There is no presser in Washington tonight just the decision and an accompanying statement so the language used in the publication will be scrutinised for changes in tone and hints as to whether we are likely to see four hikes in an effort to subdue rising inflation. The Feds preferred measure of inflation, PCE is dead on its 2% y/y target at the moment and with 10 year Treasury yields around 3% the markets obviously feel we could see Fed Chair, Jerome Powell and his fellow policy makers move four times this year. EUR/USD sits at 1.2015.

Sterling’s fall against the euro has not been as dramatic as against the dollar as the shared currency has also recently lost ground. The economy’s stellar performance last year seems to have moderated this year and with inflation persistently under target it’s likely we will see the ECB announce a taper of its asset purchases through to at least the end of the year at its June meeting. Today’s big print is the first quarter GDP reading from the bloc with 0.4% penciled in for Jan-March. GBP/EUR is just above the 1.13 handle.

The RBA left rates unchanged yesterday and maintained its neutral bias, with little change in language from its previous statement. AUD/USD dropped below 75 cents for the first time since December yesterday as the dollar gained across the board. GBP/AUD briefly tested 1.81 this morning having being close to 1.85 last week again illustrating sterlings recent woes.

Canadian GDP surprised to the upside yesterday with the economy seen to be expanding at 0.4% for the month of February. BOC Head, Stephen Poloz highlighted the high level of household debt in a speech in Yellowknife yesterday which is likely to slow the pace of any interest rate hikes. GBP/CAD is back below 1.75.

The theme of this week continues to be the strength of the US Dollar and shows no signs of easing as we reach critical support levels for the New Zealand Dollar. Opening Tuesday morning already under pressure at 0.7040, the Kiwi maintained a very tight range throughout the domestic session. The majority of downside movement on the NZD/USD currency cross occurred in the North American session seeing dips in the 69 US cent range for the first time this year. Some support was given to the local unit by a higher than expected Employment Change reading for the first quarter showing a rise of 0.6%. GBP/NZD is just below the 1.94 handle.