Confident that rate cut is only 50/50
The preliminary UK manufacturing PMI strengthened to 49.8 for January; another forecast beating confidence indicator. Service sector PMI printed a 16-month high of 52.9 from 50.0 previously. Survey compilers, Markit, commented that the recent recovery in business confidence would significantly reduce potential for a near-term Bank of England rate cut. The Pound initially moved higher, but swiftly dipped lower as profit taking emerged. The futures market saw only a modest market re-pricing of rate cut probability this week which limited Sterling support.
Sterling dipped below 1.3100 against the Dollar triggering stop-loss selling while the Euro found support below 1.1900. Futures market data recorded a small drop in bets on the Pound rising, but enough remain for a noticeable sell-off should sentiment dip again. This morning the Pound opens lower, near 1.3060 on the Dollar and 1.1850 on the Euro as global risk appetite remained weaker.
The US manufacturing PMI index declined to 51.7 for January from 52.4 previously and below consensus forecasts of 52.6, but the services sector component strengthened to 53.2 from 52.8 and this was the strongest reading since March 2019. Employment also increased at the fastest pace for 6 months while price pressures increased slightly within services, but remained subdued in manufacturing.
The data overall indicated solid growth and provided limited dollar support.
The German flash PMI manufacturing index strengthened to a 7-month high of 45.2 for January from 43.7 and above consensus forecasts of 44.5, although this was still the 12th successive reading below the benchmark 50.0 threshold. The Euro-zone manufacturing index strengthened to 47.8 from 46.3 previously. There was a significant improvement in the German services sector, but the overall Euro-zone services sector slowed. In comments following Thursday’s ECB meeting, President Lagarde stated that the bank was not yet seeing transmission from wages growth to inflation. German yields failed to make headway following the data and comments with the Euro continuing to drift lower.
Yield spreads moved slightly against the single currency and the Euro dipped to fresh 7-week lows near 1.1020. The Italian Northern League party lost a regional vote which dampened expectations of a fresh general election. The Euro remains on the defensive as we move into Monday’s open, with the common currency at 1.1025 against the Dollar.
Data to watch
09:00 – EUR – German IFO Business Climate