Pound Slips Against Dollar as Data Nosedives

Daily Analysis - 04/10/2017

Shocking Contraction in UK Construction Prompts Decline

The British Pound tumbled to a three-week low against the US dollar amid weaker than expected construction sector activity and rising uncertainty surrounding the ongoing Brexit negotiations. Sterling’s losses powered the FTSE 100 to a near eight-week high as UK stocks became cheaper relative to foreign multinational peers.

GBPUSD Proves to be Precariously Poised

UK construction firms recorded their sharpest dip in activity since just after the Brexit vote in June of 2016 as clients put on hold new projects due to uncertainty about the state of the economy. The Markit UK Construction PMI sank to 48.1 last month from August’s 51.1, easily trailing the consensus of economists polled by Reuters. In a statement following the release of the index, Markit said the likelihood of the Bank of England raising interest rates next month also played an important role behind the slowing pace of home building.

GBPUSD is currently trading around the 1.3274-mark. The short-term trend in the pair has turned bearish, with 1.3220 representing the immediate support on the downside. A break below that zone could see the selling pressure in the currency pair intensify.

Dow Clocks Fresh High

The Dow Jones Industrial Average hit a fresh lifetime high on Tuesday, boosted by better-than-expected economic figures and investor hopes for impending tax-cut legislation. Auto and industrial shares surged after data showed the seasonally adjusted annualized sales rate for US light vehicles touched 18.57 million units in September, up from 16.14 million in August. Vehicle replacement needs in the wake of the hurricanes have been pinned as the primary factor driving the recent surge.

In addition, the revival of the “Trump” trade amidst expectations that the recently unveiled Republican tax overhaul could spur economic growth also drove investor flows in to US equities. For now, the focus of financial markets is firmly affixed on the third quarter earnings season beginning next week. Dow futures rallied to new lifetime high of 22622 on Tuesday, with the index consolidating within a tight range since the Asian session.

Japan Services Growth Decelerates to Slowest Pace in 11 Months

According to a leading industry gauge released early Wednesday, the Japanese services sector expanded at the most sluggish rate in 11 months in September after the rate of new order growth eased. On a seasonally adjusted basis, the Markit/Nikkei Japan Services PMI fell to 51.0 last month from 51.6 in August, marking the lowest point since October of 2016. However, the index continued to remain above the 50-threshold that separates growth from contraction for the 12^th-straight month. The index for new businesses dropped to 52.0 in September from 52.4 in the prior month.

Although the Japanese economy grew at an annualized 2.50% during April-June, buoyed by stronger consumer spending and housing investment, many economists reckon this pace is unsustainable and forecast an approaching moderation in growth. The EURJPY pair is currently hovering around 132.400 after a limited reaction to the economic data.

Euro Area Producer Inflation Picks Up

Producer prices in the Euro Zone grew significantly more than anticipated during August, underscoring the strength of rebounding inflation across the 19-nation currency bloc. Industrial producer prices gained 2.50% year-on-year through the end of August compared to a 2.00% gain in July. Economists polled by FactSet had forecast an uptick to 2.30%. The increase in producer prices was led by a 3.40% spike in energy prices alongside a 3.00% surge in the prices of intermediate goods per figures released by Eurostat on Tuesday.

Producer prices typically foreshadow changes in consumer price inflation and are closely tracked by policymakers to understand broader price trends. By comparison, headline consumer inflation stood at 1.50% in August and September. The EURGBP pair was last seen around 0.8865 with any break above 0.8910 suggesting the completion of a bullish head and shoulders patterns, potentially unlocking further upside.