Euro and Pound Fall As Service Sectors Contract Further, Fueling Speculation Of Deeper Interest Rate Cuts


The Euro fell sharply to as low as 1.2610 before finding support as weak service sector and retail sales reports generated bearish sentiment. The Euro-Zone PMI measurement fell to 42.5 from the flash estimate of 43.3 and last months read of 45.8.

• Japanese Yen: Finding Support at 92.80
• Pound: Service Sector Falls To Record Low
• Euro: Service Sector and Retail Sales Slump
• US Dollar: ADP and ISM Non-manufacturing on Tap

Euro and Pound Fall As Service Sectors Contract Further, Fueling Speculation Of Deeper Interest Rate Cuts.

The Euro fell sharply to as low as 1.2610 before finding support as weak service sector and retail sales reports generated bearish sentiment. The Euro-Zone PMI measurement fell to 42.5 from the flash estimate of 43.3 and last months read of 45.8. The drop dragged the composite reading for the economy to 38.9 from its initial estimate of 39.7 signaling that a turnaround in growth may be in the distance. The prospect of a prolonged recession led to consumers tightening their wallet as Euro-Zone retail sales fell 0.8% in October, which was the first decline in four months.

When looking at the breakdown of the indicators the outlook for the regions economy becomes dimmer. Consumers have retrenched as they brace for recessionary times, evidenced by the 0.5% decline in food purchases. Additionally, the service sector saw new business sink to 37.9 from 40.1 and employment fall to 43.1 from 45.1, signaling that the labor market may weaken adding more pressure on consumers. The slew of dour fundamental data has raised expectations that the ECB will cut rates by more than the consensus forecast of 50 bps which could lead to the Euro breaking from its current range. The single currency has traded between 1.2400 and 1.300 since late October and it may take an aggressive move from the central bank to sink it below support. Tomorrow the MPC will announce its next rate decision which may limit the downside momentum today as traders wait and see if the central bank will continue their measured approach or follow other policy makers on a accelerated path of easing.

The Pound fell over 200 bps during the overnight session as the service PMI reading fell to its lowest level since records began in 1997. The reading fell to 40.1 from 42.4. A closer look at the breakdown revealed that employment, new orders, outstanding business and business expectations all hit new series lows, while prices charged was the lowest in 7 years. The dearth of new activity underlines the troubles that the British economy is facing and increases expectations that a deep recession is in store. The Pound will continue to trade heavy leading up to tomorrow’s central bank rate decision as expectations are that at least a 100 bps cut is forthcoming.

Global recession concerns are driving risk aversion flows, which has led to the dollar gaining against most currencies. Today’s economic calendar will only add to trader’s concerns as reports on private employment and the service sector are expected to report further weakness. Indeed, the ADP jobs report is expected to show that employers cut another 205,000 positions in November. Meanwhile, the service sector expected to have contracted further with economist expecting a reading of 42.0 from the November ISM report, which would supplant last month’s 44.4 as the lowest ever recorded. Further weakness in the sector which accounts for 90 percent of GDP signals that the economy may be headed for a prolonged recession which should drive more investors to seek the safe haven of U.S. Treasury’s and lead to Dollar strength.

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