What’s been happening?

Pound Sterling – UK Markets 

The British pound gathered strength on Tuesday amid renewed Brexit optimism and rose to its best level in three weeks against the euro and regained all the losses it recorded vs the dollar in the last two weeks. Earlier in the day, the Mail on Sunday reporter Harry Cole said that British Prime Minister Theresa May was not going to present the ‘Matlhouse Compromise’ Brexit proposal to the EU in this week’s meetings. However, the PM’s spokesman James Slack said that he wouldn’t “characterise the proposal as dead.” Furthermore, following his meeting with PM May, lawmaker Steve Baker told reporters that the ‘Malthouse Compromise’ was “alive and kicking” to provide an additional boost to the currency in the evening. 

The UK’s Office for National Statistics on Tuesday reported that the unemployment rate in the last quarter of the year stayed unchanged at 4% as expected and the claimant count change in January decreased to 14.2K in January from 20.8K in December. Regarding the wage inflation, “Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.4% both excluding and including bonuses compared with a year earlier,” the ONS said in its publication.  

US Dollar – US Markets

The NAHB on Tuesday reported that the builders’ confidence improved in February with the Housing Market Index rising to 62 in February from 58 to beat the analysts’ estimate of 59. Despite the upbeat housing market data, the US Dollar Index, which gauges the dollar’s value against a basket of six major currencies, extended its decline and closed in the negative territory for the fourth straight day as a more-than-1% drop witnessed in the 10-year T-bond yield weighed on the currency. 

Before the FOMC publishes the minutes of its last meeting on Wednesday, New York Fed President John Williams stated that the Fed would need to adopt a different outlook for inflation or growth to back further rate hikes. “The Fed’s new patient stance does not mean not raising rates or that policy is set for all time,” Williams told Reuters in an interview. On the other hand, Cleveland Fed President Loretta Mester argued that ending the balance sheet trimming wouldn’t have a material impact on the economy and added that a rate increase may be needed later this year. 

Euro – European Markets

The shared currency preserved its strength against the greenback on Tuesday but suffered heavy losses vs the pound sterling following the day’s mixed macroeconomic data. The European Central Bank on Tuesday announced that the current account surplus in December dropped to €16 billion from €23 billion in November and missed the market expectation of €21.4 billion. Other data from the euro area revealed that the construction output contracted by 0.37% on a monthly basis in December.

In the meantime, the ZEW reported that the economic sentiment in both the euro area and Germany improved in December. However, the Current Situation Index in Germany dropped to 15 from 27.6 in January and fell short of the experts’ forecast of 23. Commenting on the data, “The economic situation in Germany has been weak, especially in the manufacturing sector. The figures for industrial production have once again seen a decrease, incoming orders are stagnant and foreign trade currently provides no fresh impulses,” ZEW President Professor Achim Wambach said. “All of this is reflected in the fact that the assessment of the current situation has experienced a considerable decline. For the next six months, the financial market experts in our survey do not expect any improvement.” 

What’s coming up? 

UK: The CBI will publish its Industrial Trends Survey on Wednesday. More importantly, investors will be watching for headlines coming out of the critical meeting between PM May and EU’s Juncker.

US: The FOMC is scheduled to publish the minutes of its January 29-30 meeting and analysts will be looking for clarity regarding the balance sheet reduction strategy.  

EU: The European Commission will release the preliminary consumer confidence data for February.