The Pound surged against the Euro and the US Dollar yesterday, after the Bank of England (BoE) indicated interest rates might be raised sooner than investors expect. The BoE also raised its GDP forecasts for this year, but governor Mark Carney said the estimates were based on a “smooth transition” Brexit agreement process. Today’s release showing the UK’s trade deficit widened by more than expected has sent Sterling lower, on growing concerns about the UK’s future trade prospects.
The US Dollar is weakened by the unpredictability in the markets and the political disagreements that have caused a second government shutdown in less than a month. Concerns about rising interest rates contributed to global stock market volatility which is ongoing. Yesterday, the Dow Jones Industrial Index fell by 1,032.89 points, or 4.2%, for the second time in the week.
Pound Sterling – UK Markets
The Pound jumped sharply against the US Dollar, with the exchange rate briefly back up to $1.40, before retreating to $1.39. Sterling also advanced against the Euro, before exchanging slightly lower today at €1.13.
Yesterday’s Bank of England (BoE) monetary policy committee voted unanimously not to raise interest rates, but the BoE warned that rates might be raised sooner than May, which is what has been broadly expected. Mark Carney’s upbeat comments on increased expectations for UK growth came with the caveat that this was based on an assumption of the government making progress on Brexit transition negotiations. Carney also pledged that the central bank will be “absolutely clear” about its economic forecasts over the next year as policymakers become “a lot better informed” about Brexit.
December’s trade balance revealed a total deficit of £4.9bn for goods and services. The Goods Trade Balance widened to £-13.576bn, missing the forecast of a deficit of £11.6bn. This is the worst reading since September 2016, and it is especially disappointing since the weaker value of the Pound was expected to boost exports much further. The British Chamber of Commerce called for clarity on the future trading relationship with EU to support the UK’s trade performance.
The UK’s Industrial Production output fell by 1.3% in December, due to a sharp decline in mining and quarrying as well as the shutdown of the North Sea Forties oil pipeline. After a 0.4% month-on-month rise for November, output was expected to decline by just 0.9%. Manufacturing Production rose by 0.3% month-on-month, meeting expectations. The key construction sector showed output was up 1.6% month-on-month, which surpassed expectation.
According to the National Institute of Economic and Social Research (NIESR), the UK’s GDP had been estimated to drop to 0.3%, which was a sharp decline from the previous figure of 0.6. However, the NIESR published a report showing a more positive revised growth estimate earlier this week which anticipated 1.6% GDP growth this year. This makes it likely that the estimated GDP figure due out for release today might be revised higher.
US Dollar – US Markets
The US Dollar is slightly weaker against the Euro, exchanging at €0.80. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is down, at 90.26.
The US government shutdown and budget deal is the central focus of US economic news today, with no top tier data due out for release today. House of Representatives minority leader Nancy Pelosi, gave an 8-hour speech to convince Republicans to allow a vote that protects “Dreamers,” undocumented immigrants who came to the US as children. Her speech appears to have inspired Republican Paul Ryan to stall the passage of the budget bill which he objected to, because it significantly increased the federal deficit. Since the bill was not passed by the midnight deadline, the government shutdown was triggered, since funding had expired. Early this morning, the senate passed the bill by a vote of 71 to 28.
After the 600-page budget plan was passed by the Senate, it went to the House of Representatives for their vote. The House swiftly passed the bill, with a vote of 240 to 186, at around 5am, in spite of objections that the bill does not address immigration. President Trump has indicated that he will sign the legislation, so that the government will likely be reopened before the US working day begins on Friday.
US jobless claims have fallen to a near 45-year low, according to the US Labour Department’s release of weekly Initial Jobless Claims for last week. The number filing for claims was 221,00, lower than the expected figure of 232,000. This was the second straight weekly decline, pointing to strong job growth momentum. The report marked the 153rd straight week of claims below the 300,000 level, which is the longest such stretch since 1970.
Euro – European Markets
The Euro is rising slightly against the US Dollar, with the exchange rate set at $1.22.
Germany’s trade surplus in 2017 shrunk for the first time since 2009, according to yesterday’s release by the Federal Statistics Office. The trade surplus dropped down to €244.9bn from its record-high of €248.9bn in 2016. The current account balance, which measures goods, services and investments, dropped from €259.3bn to €257.1bn. The improved trade balance was led by an increase in imports, driven by higher consumption which is expected to fuel increasing growth this year.
Greece’s public debt management agency launched the sale of their delayed seven-year bond yesterday, when the volatile markets had briefly calmed. Greece has begun marketing the bond at around 3.75% yield. The government hopes the bond will raise at least €3bn, which will be added to the €6.5bn cash buffer to cover debt repayments to the EU and International Monetary Fund when its third bailout programme ends, possibly in late June.
Greek unemployment held steady at 20.9% in November, more than twice the Eurozone average. In figures released yesterday by ELSTAT, the jobless rate was 43.7% for people aged 15 to 24, an improvement over the 46.1% rate in the same month in 2016. Greece’s unemployment rate has dropped steadily from its record high rate of 27.9% in September 2013, and the government anticipates it will fall to 18.4% this year.
Other Currencies – Highlights
Sterling has slipped against the Australian Dollar, with the exchange rate at 1.78 AUD. The Reserve Bank of Australia’s (RBA) quarterly monetary policy statement was cautiously optimistic, with the expectation of GDP growth of 3.2% for this year and 2019. The RBA also said a weaker Australian Dollar would improve the prospects for growth and inflation.
The Pound is weaker against the New Zealand Dollar, today, exchanging higher at 1.92 NZD. The Reserve Bank of New Zealand pushed back their estimate of hitting their target inflation rate by two years, until 2020. They also trimmed their GDP forecast and said they expect the value of the Kiwi to weaken.
The Pound is performing well against the Japanese Yen, exchanging higher at 151.85¥. Japan’s most widely watched measure of money, the M2 and CD, which includes all currency in circulation and all banks accounts, fell to 3.4%, below the previous increase of 3.6%.