Relative expectations were a key factor in global currency markets during Tuesday with traders demonstrating a lack of confidence in most major currencies outside the US. The Euro and Sterling remained fragile on growth fears and the Australian dollar dieclined sharply as the central bank indicated that the next policy move could be a cut in interest rates. In this environment, the dolalr continued to gain support by default and made net gains despite a USD/JPY retreat.
Pound Sterling (GBP)
Sterling drifted lower early on Tuesday and failed to regain support. The PMI index of activity in the dominant services sector declined to 50.1 from 51.2 previously and suggested that the economy was perilously close to contraction as political uncertainty had an important impact in undermining activity. Sterling continued to lose ground after the data with a GBP/USD dip below 1.3000 triggering fresh selling and 2-week lows below 1.2950. There was no evidence of progress on the Irish backstop which hampered the currency. GBP/EUR dipped below 1.1350 before recovering slightly after reports that Brexit could be delayed by 8 weeks.
There was a small upward revision to the Euro-zone business confidence index, although Italian data signaled a dip into contraction which undermined sentiment. Sources indicated that the ECB was reluctant to change forward guidance on when interest rates might increase, but markets had already shifted their expectations with no increase expected until 2020 which continued to sap currency support. Overall, EUR/USD declined to test the 1.1400 area as underlying sentiment remained weak and the pair traded below this level on Wednesday as German data recorded a further decline in industrial orders.
There was a further slide in US consumer confidence to the lowest level since October 2017 which triggered fresh doubts over consumer spending. Headline US services-sector data was also slightly below consensus forecasts, although there was still evidence of solid growth and markets overall continued to expect US out-performance in global terms. None of the European currencies were able to command significant support which helped underpin the dollar as commodity currencies also declined sharply. President Trump’s speech had little impact with USD/JPY around 109.70 after again failing to hold above 110.00.
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