Market Info

UK construction feels the effects of Brexit

04/10/2017 | OzForex

United States Dollar:

The US Dollar rally stalled through most of Tuesday as markets squared up positions ahead of a busy end of the week. In what was a quiet day on the economic calendar the greenback retreated from six-week highs as investors held off initiating large positions ahead of a speech by Federal Reserve chair Janet Yellen today. Yellen will speak at the Community Banking in the 21st Century Conference amid growing speculation concerning her position as Fed chair. Fed Governor Jerome Powell and former Fed governor Kevin Warsh are reportedly on a shortlist of candidates to succeed Janet Yellen. The greenback was well supported though on the optimism of a rate rise in December, nearly 80% of traders expect the central bank to hike rates compared to just 50% a month ago. EUR/USD was able to capitalise on the dollar’s light calendar moving from a low of 1.1698 t a high of 1.1778. On today’s docket in addition to Yellen we also have non-manufacturing PMI, ADP Non-Farm Employment Change and crude oil inventories.

UK construction reported the sharpest fall in activity since just after June 2016’s Brexit vote on Tuesday. The IHS Markit/CIPS construction purchasing managers’ index (PMI) sank to 48.1 in September from August’s reading of 51.1, its lowest since July 2016 and far below all forecasts of 51.1. Anything below 50 is deemed as contraction and although the construction PMI makes up just over 6 percent of Britain’s economy this number could throw a spanner in the works just as the BOE starts to raise rates. Uncertainty surrounding Brexit seems to have hit the construction industry the hardest, with the cost of building supplies rising at its fastest rate in seven months this having a knock-on effect on building projects too. With Sterling down across the board, it was dealt another blow after UK trade secretary Liam Fox said “if no trade deal is made with the European Union by March the UK will have no choice but to walk away”. These comments cementing the view we could be heading for a hard Brexit. Cable dropped to just over 2 week lows of 1.3231 throughout the day. Today’s PMI is viewed as the big brother of all the PMI’s, the biggest contributor to the UK economy, should this fall short the Pound will most certainly drop further.

We expect a range today in the GBP/USD 1.3180 to 1.3280

Euro:

The Euro was able to bounce off six week lows yesterday as selling pressure consolidated. The single currency is not in clear water yet though and should still be met with caution. Political uncertainty still dominates the Euro movement, with the unexpected outcome of the German election back in September and Sundays independence referendum in the Spanish region of Catalonia things still remain very unclear. It’s safe to say the brakes have been applied to Euros advances at the moment and should Draghi remain cautious at his speech today, which many think he will be, this could result in some further selling of the Euro. In addition to Draghi speaking today, we have the release of Service’s PMI and retail sales.

We expect a range today in the GBP/EUR rate of 1.1170 to 1.1310

Aussie and Kiwi Dollars:

Overnight for the aussie was a quiet one. AIG services index released showed a marginal decline but not enough to move the markets. In fact, the aussie capitalised on sterling’s poor showing yesterday falling below the 1.70 handle at the start of the day and hitting a low of 1.6862.

The New Zealand Dollar hit a near 4 month low as dairy prices underperformed overnight. The Global Dairy Trade auction portrayed an average price decrease of 2.4%, making it the weakest auction in more than six months. Exacerbating the falling Kiwi was further evidence of a cooling property market, which weighed on market sentiment as the argument for a rate hike was further undermined. Not long after the release of the index the losses were wiped on the back of the ANZ Commodity Price index, lifting 0.8% m/m in September this was the first time since June. NZD/USD moved off a 4 month low of 0.7147 to a day high of 0.7197.

We expect a range today in the GBP/AUD rate of 1.6790 to 1.6910

We expect a range today in the GBP/NZD rate of 1.8390 to 1.8490

Data Releases

AUD: Retail Sales m/m, Trade Balance

EUR: Final Services PMI, Retail Sales m/m, ECB President Draghi Speaks

GBP: Services PMI

NZD: No data

USD: ADP Non-Farm Employment Change, ISM Non-Manufacturing PMI, Fed Chair Yellen Speaks

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