What’s been happening?

Pound Sterling – UK Markets 

The British pound closed the day slightly lower against the dollar but rose to its highest level since April vs the euro after the shared currency came under heavy selling pressure after European Central Bank (ECB) President Draghi adopted a cautious tone in the press conference following the ECB’s monetary policy announcements.

Mark Carney, Governor of the Bank of England, repeated that it wasn’t automatic which way the monetary policy would go in the event of a hard Brexit. Commenting on the economic slowdown, “Better position of household balance sheets, relative to the financial crisis, a reason for confidence that slowdown will not turn into stagnation,” Carney told reporters on the sidelines at the World Economic Forum in Davos. Additionally, in a speech delivered to business leaders in Davos, British Chancellor of the Exchequer Philip Hammond argued that not leaving the EU would be seen as a betrayal of the referendum decision. “But leaving without a deal would undermine our future prosperity, and would equally represent a betrayal of the promises that were made,” Hammond further elaborated.  

Earlier in the day, citing unnamed UK officials, Bloomberg reported that the government was against the Cooper amendment, which is aimed at changing the Brexit procedure to allow an extension to the Article 50 if May’s plan fails to pass through the Parliament. 

US Dollar – US Markets

The US Dollar Index, which tracks the greenback against a basket of six major currencies, gained traction in the second half of the day and rose to its highest level since early January boosted by the upbeat macroeconomic data releases from the U.S. The Bureau of Labor Statistics on Thursday reported that the initial weekly jobless claims fell to its lowest level since 1969 at 199,000. Commenting on this data, White House economic advisor Kudlow said that jobless claims readings pointed out to a significant increase in the January jobs report.

Additionally, the IHS Markit’s PMI reports all came in better than analysts’ estimates to ease concerns over an economic slowdown in early 2019. “US businesses reported a solid start to 2019, with the rate of expansion running only slightly weaker than the average seen in the second half of last year,” Chris Williamson, Chief Business Economist at the IHS Markit explained. “The resilience of the survey data suggest little impact from the government shutdown on the private sector, with very few companies reporting any material detrimental impact on their output or order books.”  

Meanwhile, the U.S. Senate blocked a Republican bill to fund President Trump’s proposed border wall and end the government shutdown but the market reaction to this development was relatively muted as it was largely expected.  

 Euro – European Markets

The shared currency fell sharply against both the dollar and the pound sterling on Thursday amid disappointing macroeconomic data and ECB President cautious comments regarding the economic outlook.

As expected, the ECB decided to leave the interest rates on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.40%, respectively. While speaking at the press conference, President Draghi said that the incoming data had been weaker than expected and added that the Governing Council was unanimous in acknowledging the weaker momentum and the changing balance to the risk while adding. Regarding the policy outlook, Draghi explained that they will continue to asses the data until the March meeting while warning that convergence to the inflation target could take longer than expected if the growth were to remain below potential.  

The data published by the IHS Markit on Thursday showed that the Manufacturing PMI dropped below the 50 in January to show a contraction in the sector for the first time in more than four years. German Composite PMI, however, improved slightly supported by a stronger service sector. “Manufacturing fell into contraction in January as the sector’s order book situation continued to worsen, showing the steepest decline in incoming new work since 2012. Weakness in the auto industry was once again widely reported, as was a slowdown in demand from China,” Phil Smith, Principal Economist at the IHS Markit noted. The IHS Markit further reported that business activity in both the manufacturing and service sector in the euro area expanded at a slower pace than expected in January. Commenting on the data, “The Eurozone economy slipped closer to stall speed in January, with companies reporting the first drop in demand for over four years. The disappointing survey data indicate that GDP is rising at a quarterly rate of just 0.1%,” Chris Williamson said.   

What’s coming up? 

UK: The British Bankers’ Association (BBA) will publish December mortgage approvals data on Friday.  

US: The Financial Management Service will release its monthly budget statement.   

EU: The Ifo’s sentiment report for Germany, which will include Current Assessment, Expectations, and Business Climate indexes, will be featured in the European economic docket on Friday.