Dollar sinks as US service sector suffers its worst month in six years

The Greenback subsequently fell sharply against both the Euro and the Yen, while plunging to its weakest position against Sterling since mid-July.

Sterling remained well supported by Monday’s overwhelmingly impressive UK services PMI, which suggested that Britain’s economy is likely to avoid a recession despite June’s shock Brexit vote.

UK industrial and manufacturing production data for July this morning are expected to shed more light on the impact of the Brexit vote. The Bank of England will also be in sharp focus this morning with Governor Mark Carney set to appear before the Treasury committee to present the inflation report hearings. Carney is expected to be grilled on the central bank’s decision to cut interest rates to a record 0.25% last month, a move that some analysts are already suggesting could prove premature and counterproductive following the recent rebound in domestic economic activity.

Away from the G3 currencies, the Reserve Bank of Australia kept its interest rate on hold at a record low 1.5% yesterday as expected. The Australian Dollar was little moved on the back of the news.

Major currencies in detail:

GBP

Sterling rallied 0.7% to a fresh seven week high versus the Dollar yesterday, buoyed by weak economic news out of the US.

Announcements out of the UK were few and far between on Tuesday with the Pound remaining well supported from Monday’s impressive services PMI, which calmed concerns that Britain is set to enter into a recession later in the year. While it is still early days, consumers in the UK so far appear to have largely taken the shock decision to quit the EU in their stride.

Mark Carney will be making his first public appearance since last month’s interest rate cut today, appearing alongside fellow MPC members Cunliffe, Vlieghe and Forbes. The questions will focus heavily on August’s Inflation Report where Carney announced a raft of new stimulus measures to prop up Britain’s economy.

EUR

Yesterday’s weak economic news out of the US sent the Euro 0.7% higher against the Dollar to its strongest position in nearly two weeks.

The single currency was little moved following Tuesday’s revised economic growth figures for the second quarter, which remained unchanged at 0.3% quarter-on-quarter and 1.6% on a year previous. We think the Eurozone’s persistent inability to grow even a modest 2% on an annualised basis could cause the European Central Bank to hint a that further monetary stimulus could be on the way at its highly anticipated meeting on Thursday .

German industrial production figures this morning are expected to show a modest slowdown. We look to Thursday’s European Central Bank monetary policy meeting as the biggest event risk in the currency markets this week.

USD

The US Dollar fell 0.8% against its major counterparts on Tuesday following the dismal service sector data released across the pond.

Any lingering hopes of an earlier-than-expected interest rate hike by the Federal Reserve later this month were dealt a blow yesterday, following the release of a very weak set of non-manufacturing data from ISM. Business activity in the sector slumped, while new orders plunged by almost nine index points to a level barely representing an expansion. We think this confirms the Fed will hold rates steady until its December meeting.

Job openings data from JOLTS will be the main economic release in the US today in an otherwise quiet day. With announcements relatively thin in the US this week, attention will be firmly on Thursday’s European Central Bank monetary policy meeting.

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