What’s been happening?

Pound Sterling – UK Markets 

The British pound came under strong selling pressure and weakened to its worst level in more than two weeks against the dollar after the Bank of England in the Quarterly Inflation Report announced that it lowered 2019 GDP growth forecast to 1.2% from 1.7% seen in November’s report due to persistent Brexit uncertainty and tighter financial conditions. In its monetary policy summary, the BoE announced that it kept the policy rate unchanged at 0.75% with a unanimous vote in a widely expected decision. “The economic outlook will continue to depend significantly on the nature of EU withdrawal,” the BoE repeated. “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”

While speaking in the press conference, Governor Mark Carney argued that the UK economy as a whole was not yet prepared a no-deal Brexit while urging the Parliament to “get it right on Brexit.” Carney further explained that the level of uncertainty and the proximity of the Brexit date was having a much bigger impact on businesses than initially anticipated. On a positive note, Carney stated that there was an upside for the UK economy if there was clarity on Brexit deal sooner and added that markets shouldn’t start preparing for a scenario of no further rate hikes. Boosted by these relatively optimistic comments, the sterling recovered its daily losses and closed the day modestly higher vs both the euro and the dollar.

In the meantime, following her meeting with European Council President Donald Tusk, British Prime Minister Theresa May told Sky News that she had a good meeting and reiterated that they were aiming to secure legally binding changes to the Withdrawal Agreements. On the other hand, "Meeting PM Theresa May on how to overcome impasse on Brexit. Still no breakthrough in sight. Talks will continue," Tusk tweeted out. 

US Dollar – US Markets

The greenback preserved its strength against its major rivals for the sixth straight day on Thursday and the US Dollar Index advanced to its highest level in two weeks. However, the lack of significant macroeconomic data releases suggested that the dollar’s upsurge was driven by the market demand shifting away from the euro and other risk-sensitive currencies. The only data from the U.S. showed that the initial jobless claims fell to 234K in the week ending February 1 from 253K.

Later in the day, following a conference at the bank’s headquarters, Dallas Fed President Robert Kaplan told reporters that the Fed had the “luxury” of leaving the policy rate unchanged with structural forces in the economy likely to keep inflation pressures muted. Kaplan also touched on the slowing global growth outlook and said it was one of the headwinds to the economy.    

Euro – European Markets

Hurt by more disappointing data, the shared currency continued to weaken vs both the dollar and the pound sterling on Thursday. Reflecting the gloomy outlook in the euro area, the 10-year Italy-Germany bond yield spread rose to its highest level in two months by rising nearly 6% on the day. 

In its monthly Economic Bulletin, the European Central Bank reiterated the message from its latest monetary policy statement by noting that the incoming data has continued to be weaker than expected amid softer external demand and some country and sector-specific factors. “Overall, the risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility,” the ECB concluded. Additionally, Germany’s Destatis reported that the industrial production in Germany contracted by 0.4% on a monthly basis following November’s 1.3% decline and missed the market expectation of +0.7% by a wide margin. 

What’s coming up? 

UK: There won’t be any macroeconomic data releases from the UK on Friday and markets will stay focused on Brexit headlines.

US: An empty U.S. economic docket is likely to leave the dollar at the mercy of T-bond yields.

EU: Nonfarm payrolls from France and trade balance/current account data from Germany will be released on Friday.