Fewer US Jobs than Expected and a Weak Dollar
The three weakest currencies of the week were, in order… The US dollar, the British pound and the euro. The dollar got off to a bad start last Friday when the US employment report showed fewer than expected new jobs were created in August.
In contrast to its UK counterpart’s upbeat tone on Monday – which lent further support to the pound. The Institute for Supply Management’s purchasing managers’ index for the US services sector, was far from supportive towards the dollar on Tuesday. There was a sharp decline to 51.4 for August from 55.5 the previous month – the lowest reading since February 2010. This undermined confidence in the overall US economic outlook and in doing so reduced expectation of higher-rates in 2016. Investors were spooked from the dollar, which dipped lower against both the pound and euro.
A Brexit-fuelled seven year low
Sterling, having benefitted from unexpectedly good purchasing managers’ index readings, dropped the baton after the Bank of England governor addressed parliament’s Treasury Committee.
The powerhouse UK service industry, which makes up almost 80% of the UK economy, rebounded to expansionary territory last month. The purchasing managers index (PMI) for the sector jumped to 52.9 from July’s Brexit fuelled seven-year low of 47.4 – the biggest one-month gain in the survey’s 20-year history. The upbeat tone of the report by market research group Markit, echoed the encouraging numbers released last week for the manufacturing and construction sectors in August.
Optimism over the health of the British economy was restored, in the short-term at least. The pound soared to a seven-week high against the US dollar and extended its euro gains from Friday.
Bank of England governor Mark Carney, shrugged off the naysayers (Brexit supporters) criticism of the central banks cautionary tone around the potential economic impact of the ‘Leave’ vote – and its subsequent measures to mitigate the ramifications. When questioned by MPs on the Treasury Select Committee at Wednesday’s inflation report hearing. Mr Carney described himself as, “absolutely serene about the judgments made by both the MPC and FPC” around the time of the referendum. He added, that last month’s rate cut to an historic low of 0.25%, had helped support house prices and the wider economy.
Door left open to further rate cuts
Investors did not share the governor’s serenity about the situation however. It sent sterling lower after Mr. Carney and his colleague Jon Cunliffe left the door open to a further rate cut. Sir Jon said, he would expect to vote for one this year, if the economy were to play out according to the bank’s forecasts. They had already been put in a selling mood during the morning, when, although UK industrial production rose by 0.1% in July, the figures for manufacturing production showed a -0.9% fall.
Euro boost from the ECB
The euro received a late boost from the European Central Bank, which failed to announce fresh stimulus measures after Thursday’s Governing Council meeting. The ECB turned out to be less eager than investors had thought, for rate cuts and asset purchases. Over the last seven days, the euro added three quarters of a US cent, and strengthened by half a cent against sterling.
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