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US services sector data compounds recession fears

While weak US services sector growth adds to rising fears of recession in the US, Boris Johnson has a week to revise his Brexit plan.

Centtrip: US services sector data compounds recession fears

Weaker-than-expected services sector growth caused the Dollar to retreat, with the Dollar Index shedding about 0.9 per cent to 98.816, after hitting a two-and-a-half-year high earlier this week. It is down 0.3 per cent on the week.

A soft US services sector survey came amid a swathe of weak economic data as a result of concerns that ongoing trade tensions with China and other countries could spill over into the broader US economy and eventually tip it into a recession.

Conversely the Euro, which has been dogged by concerns that Germany could slip into a recession, rose 0.15 per cent to $1.0980, extending its recovery from a near two-and-a-half-year low of $1.0879 set on Tuesday.

So far, the single currency has gained 0.34 per cent this week.

Below expectations

The US Institute for Supply Management’s (ISM) non-manufacturing activity index fell from 56.4 in August to 52.6 in September – the lowest since August 2016, and far below expectations of 55.1.

A gauge of employment in the ISM survey fell from 53.1 in August to 50.4 in September – its lowest since February 2014. That does not bode well for the key US jobs data due out today at 13:30 (GMT).

The US services sector, which has been backed by firm US domestic consumption, has previously been one of few bright spots in the global economy as the manufacturing sector worldwide has been knocked by the protracted US-Chinese trade war.

Another cut?

Heightened concerns over the services sector increased expectations that the Federal Reserve would cut interest rates on 30 October, undermining the Dollar’s yield advantage.

Fed funds rate futures are almost fully pricing in a 25-basis-point rate cut this month and a high chance of another cut by December. Market participants are predicting a 93 per cent chance of a quarter-point rate cut in October – an increase of 33 per cent from Wednesday, 2 October. However, some market players think rate cuts are far from a done deal.

In the UK, Sterling rose to a one-week high of $1.2413 yesterday, 3 October after Steve Baker, the head of a group of Eurosceptic lawmakers in the Conservative Party, said Prime Minister Boris Johnson’s latest Brexit proposal offered the possibility of a “tolerable deal”.

Still, traders remained unsure whether Johnson’s proposal to replace the Irish “backstop” was going to morph into a final Brexit divorce agreement due to mixed messages coming from both sides. The Pound is trading at 1.2350.

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