Pound dips on US dollar strength; UK service PMIs hit 10-month low

[LONDON] The pound was a touch lower versus the US dollar and euro on Thursday (Jan 6) , hurt by US dollar strength, while investors weighed up the extent to which easing fears around the Omicron coronavirus variant would translate into economic gains.

Risk-sensitive currencies such as the British pound, Australian dollar and Canadian dollar were down on the day versus the US dollar, which was boosted late on Wednesday and overnight by the minutes of the Fed's December meeting being more hawkish than expected.

These sparked worries about faster than expected monetary policy tightening as they showed that a "very tight" job market and unabated inflation might require the Fed to raise rates sooner than expected.

Services purchasing managers' index (PMI) data came in slightly higher than the preliminary "flash" reading, but still showed that Britain's services sector suffered its biggest loss of momentum last month since the country was last in lockdown, with the index falling to a 10-month low as the spread of Omicron hammered hospitality and travel.

At 1319 GMT, the pound was down 0.1 per cent against the stronger US dollar at US$1.35375. Versus the euro, it was down around 0.2 per cent at 83.575 pence per euro.

Jeremy Stretch, head of G10 FX strategy at CIBC, said that the PMI data being revised upwards from the December estimate was a sign of improvement and that euro-sterling could head below the 83 level.

"The modest uptick that we did see from the flash estimate I think is relevant because I think that does suggest that the service sector is also trying to ride out the Omicron variant in the same way the politicians are trying to do."

But Geoff Yu, FX and macro strategist at BNY Mellon, wrote in a client note that most of the gains for sterling versus the euro are already priced in.

"Barring a highly unlikely growth surge driven by productivity or real income gains, all the risks to the UK are now to the downside, and the country is still struggling to make the most of its relative lack of restrictions," he wrote.

REUTERS