The US Dollar Remains Strong, Attention Shifts to BoE
What’s been happening?
Pound Sterling – UK Markets
The pound sterling weakened moderately against the dollar while recovering a small portion of the losses it suffered vs the euro in the last few days. The Telegraph reported that the UK cabinet minister had secretly discussed plans to delay Brexit by two months, to May 24, in order to have a ‘grace period’ to work on the necessary legislation if Prime Minister Theresa May’s deal passes through Parliament. Meanwhile, a recently conducted Reuters poll revealed that the British Pound was expected to lose value between 5%-10% in the event of a disorderly Brexit while adding it could rise between 2%-5% if the UK leaves the EU with a deal. “In one month’s time a pound will be worth $1.31, in six months $1.35 and in a year it will be almost 8 percent stronger at $1.40, according to the poll,” Reuters said.
Earlier in the day, German think-tank Ifo Institute published a study explaining how the UK can soften the hard Brexit by unilaterally waiving all import duties after March 29. "Without British import duties, consumption in the Kingdom would fall by only 0.5 percent, much less than with a hard Brexit with import duties à la World Trade Organization (WTO),” Gabriel Felbermayr, head of the Ifo Center for International Economics, argued.
Following his meeting with European Commission President Jean-Claude Juncker, Irish Prime Minister Leo Varadkar told reporters that alternative arrangements for the Irish border could not result in deletion of the backstop while adding they were open to explore them.
US Dollar – US Markets
The US Dollar Index, which gauges the dollar’s value vs a basket of six major currencies, continued to push higher for the fifth straight day on Wednesday and reached its highest level since January 25. The U.S. Census Bureau reported that the international trade deficit declined to $49.3 billion to come in better than the market expectation of $54 billion. Additionally, after losing as much as 1% earlier in the day, the 10-year Treasury bond yield erased almost all of its losses in the second half of the day to support the dollar’s upsurge.
In the meantime, in an interview with CNBC, U.S. Treasury Secretary Steven Mnuchin announced that he will be travelling to Beijing next week with other U.S. officials for a new round of trade talks with China. “We made progress last week with China over trade enforcement issues, we need to do more work on the mechanisms,” Mnuchin explained.
Euro – European Markets
The shared currency struggled to find demand and fell to its lowest level against the dollar in more than 10 days as the incoming macroeconomic data on Wednesday reminded investors of the economic slowdown in the euro area.
The monthly report published by the Deutsche Bundesbank on Wednesday showed that factory orders in Germany declined by 1.6% on a monthly basis in December following November’s 0.2% decrease and missed the analysts’ estimate of +0.3%. Additionally, the annual growth slumped to -7%, confirming the latest Manufacturing PMI data that showed a contraction in the sector. The underlying details of the publication revealed that the disappointing figures were a product of weakening domestic demand and a sharp fall in demand from non-eurozone countries.
What’s coming up?
UK: Headlines from May - Juncker meeting will be watched closely by the markets on Thursday. More importantly, the Bank of England will announce its interest rate decision and publish its monetary policy statement alongside the Quarterly Inflation Report.
US: Initial weekly jobless claims and consumer credit change will be featured in the U.S. economic docket. Additionally, Richard Clarida, Vice Chairman of the Board of Governors of the Federal Reserve System, is scheduled to deliver a speech at 14:30 GMT.
EU: Destatis will publish industrial production report for Germany. The European Central Bank will be releasing its monthly Economic Bulleting on Thursday as well.