FX round-up: Sterling zooms on UK services PMI as Q1 slowdown fears ease

Sterling got an unexpected boost on Wednesday from traders embracing better-than-expected UK services sector data, a pendulum swing away from their reaction to disappointing manufacturing and construction numbers out earlier in the week.

Markit/CIPS' services purchasing-managers' index (PMI) picked up to 55.0 in March, from 53.3 in February. The predictions in the market were for a slight rise to 53.5.

Chris Saint, senior analyst, HL Currency Service, said this data went some way to making up for the unwelcome manufacturing and construction PMI numbers.

It had boosted hopes that any "first-quarter slowdown from the (UK) economy’s stellar 0.7% expansion in the final three months of 2016 may turn out to be less pronounced than feared."

At around about 17:00 GMT, sterling was up 0.35% to $1.2484, and up 0.48% to €1.1711. The dollar-spot index was up a measured 0.12% to $100.660.

Neil Wilson, senior market analyst at ETX Capital, pondered whether sterling could hold on to these gains, having been severely devalued since last year's controversial Brexit, and all of its subsequent twists and turns.

"There's likely to be some selling into this rally that may pare gains and cable may struggle to scale the $1.25 handle on this data," said Wilson.

"The data supports the view that the Bank (of England) will need to tolerate higher inflation in order to support growth and stimulate demand, which though resilient looks vulnerable to shocks," he added.

Sterling also managed modest moves higher on the aussie, loonie and yen, and strong gains on the rand, as did the US dollar against that latter issue.

South Africa's rand plunged again as the ruling ANZ party said it stood 100% behind President Jacob Zuma who this week reshuffled his cabinet and appointed a new finance minister. S&P has already cut the nation's sovereign credit rating to 'junk'.

Turning to the US dollar, Jasper Lawler, senior market analyst at London Capital Group, said its rise came after private payrolls grew faster than expected but a slowdown in the service sector took the edge off before the release of the US Federal Open Market Committee's minutes this evening.

"Fed speakers have been quite transparent since March about the number of rate hikes expected this year," said Lawler.

"The unanswered questions relating to the minutes relate to the balance sheet. We doubt the minutes will give any details on how or when the Fed could shrink its balance sheet."

Traders were also tuned in for the start of the meetings between President Donald Trump and China's President, Xi Jinping. US non-farm jobs data on Friday was also keenly anticipated.

At about 17:00 GMT, the greenback was up on the euro, loonie, kiwi, rand and yen, but down 0.11% to A$1.3206.

"The Australian dollar could be one to watch during the Trump-Xi meeting," said Lawler, noting anything threatening China's economy almost always provoked a negative reaction in the Australian currency.

"The last thing Australia needs is the world’s superpower (ie US) picking a fight with its biggest customer."