What’s been happening?

Pound Sterling – UK Markets 

The British pound continued to weaken against its major rivals but was able to stage a modest recovery in the second half of the day. The data published by the IHS Markit on Tuesday showed that the services sector expanded at a more robust pace than expected in February with the PMI improving to 51.3 from 50.1 in January and beating the market expectation of 49.9. Additionally, the UK All Sector Output Index, a weighted average of the Manufacturing Output Index, the Total Construction Activity Index and the Services Business Activity Index, improved to 51.4 from 50.3 in January. Despite Tuesday’s positive readings, “The latest PMI surveys indicate that the UK economy remained close to stagnation in February, despite a flurry of activity in many sectors ahead of the UK’s scheduled departure from the EU. The data suggest the economy is on course to grow by just 0.1% in the first quarter,” Chris Williamson, Chief Business Economist at the IHS Markit, said.

Earlier in the day, speaking on BBC Radio 4, British Foreign Secretary Jeremy Hunt explained that the UK would be flexible on the guarantee on the Irish backstop and argued that the EU was beginning to realize that Prime Minister Theresa May could get a majority in the Parliament. “The situation has improved in last month and signals from the EU are reasonably positive,” Hunt further added. In the meantime, while testifying before the Hours of Lords, Bank of England Governor Mark Carney said that despite their preparations for a disorderly Brexit, a material shock on the economy was expected.   

US Dollar – US Markets

The US Dollar Index, which tracks the greenback against a basket of six major currencies, rose to its highest level in two weeks after the upbeat macroeconomic data releases from the U.S. boosted the demand for the currency.

The IHS Markit’s Services PMI rose to 56 in February from 54.2 in January and the ISM’s Non-Manufacturing PMI improved to 59.7 from 56.7 to surpass the market expectation of 57.4. The underlying details of the ISM’s publication revealed that the New Orders subindex rose to its highest level since 2005. Moreover, new home sales increased by 3.7% in December to beat the analysts’ estimate for an 8.7% contraction by a wide margin. Finally, the IBD/TIPP Economic Optimism Index jumped to 55.7 in March from 50.3 in February to post its largest one month increase since 2012.   

“Economic optimism at the start of March seemed to finally catch up to the Dow Jones and broader stock market rally that began just after Christmas,” Investor’s Business Daily noted. “Among self-described investors, economic optimism surged to 59.2 from 52.3. That's the best level since October, when the stock market correction began. Among non-investors, the index ticked up to 49.7 from 48.6, remaining slightly pessimistic.”

Euro – European Markets

The shared currency failed to take advantage of Tuesday’s strong data ahead of the ECB meeting and suffered losses against both the pound sterling and the dollar. The Eurostat on Tuesday announced that retail sales in January rose by 1.3% following on a monthly basis December’s 1.4% drop and lifted the annual growth rate to 2.2% from 0.3%.

Moreover, the IHS Markit’s Composite PMI edged up to 52.8 and 51.9 in Germany and the euro area, respectively, with both figures coming in better than experts’ forecasts. Commenting on the eurozone data, “Measured overall, the survey shows the quarterly rate of GDP growth picking up to 0.2% in February from 0.1% in January, meaning the first quarter could see the eurozone economy struggle to beat the 0.2% expansion seen in the fourth quarter of last year,” argued Chris Williamson, Chief Business Economist at the IHS Markit.

What’s coming up? 

UK: Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, will be delivering a speech on Wednesday.

US: The ADP’s private sector employment data and December trade balance report will highlight the U.S. economic calendar.

EU: There won’t be any macroeconomic data releases from the euro area on Wednesday.