Dollar Down After US Dominates G20
Sterling is staging a comeback, as Prime Minister Theresa May begins her Brexit tour to persuade the devolved nations of the UK to stay together. The pound rose on the Bank of England’s 8-1 vote last week to keep the UK interest rate unchanged. It’s also being helped by economists recently stating that the reality of a hard Brexit has already been priced into the pound’s value.
The US dollar remains weak after the US Federal Reserve showed restraint regarding US president Donald Trump’s nebulous economic stimulus plan. At the first G20 of Trump’s administration, his Treasury Secretary Steven Mnuchin also seemed to have vague plans as he persuaded fellow finance ministers to remove a pledge to free trade.
Pound Sterling – UK Markets
The pound has hit a 3-week high against the weak dollar. It’s been volatile recently, at an 8-week low at $1.21 against the US dollar last Tuesday before rising to a high of $1.24 on Friday morning. The pound is now said to be undervalued by economists who are taking the economy’s present health into consideration. Since the Bank of England expects the UK’s economy to grow by over 2% this year, analysts have recently said they think Sterling will strengthen, especially against the euro. Morgan Stanley says that triggering Article 50 won’t be ‘a big event for the currency’. The greater risk for Sterling, it’s thought, is the EU’s response because it indicates the course of the negotiation process.
The pound rose on this morning’s Rightmove House Price release. It shows that average house prices rose by 1.3% in March, less than February’s 2% increase. There’s a clear slowdown since the June Brexit vote, when house prices increased on average by 8% a year. This March, year-on-year house prices increased by just 2.3%. This slowing pace of prices might be a positive improvement to a market where, previously prices created affordability issues. On Friday, the Office for National Statistics put house prices in perspective by comparing them to historical house prices. The average house today is twice as dear as it was 20 years ago. When annual earnings are factored into the equation, house prices are now averaging 7.6 times annual earnings. Prime Minister Theresa May begins her tour seeking Brexit unity in Swansea where she’ll sign a £1.3billion investment deal she says will put Wales ‘at the forefront of science and Innovation’.
US Dollar – US Markets.
US President Donald Trump and German Chancellor Angela Merkel’s first visit was an opportunity for the German Chancellor to display her experience on the global stage in contrast with the new US president’s awkward bravado. The topic of trade was critical given that Germany’s exports to the US total $114 billion, whereas US exports to Germany are only $49 billion. This US trade deficit is surpassed only by its deficit with China. Following their meeting, which he described as great, Trump tweeted that ‘Germany owes vast sums of money to NATO and the United States’ in payment for military defence. Geopolitical tensions continue rising as North Korea tested another rocket-engine on Sunday as US Secretary of State Rex Tillerson met with Chinese officials to discuss an effective diplomatic solution, which China strongly prefers to a military intervention.
US consumer confidence in March rose to the highest levels seen in 16 years, jumping up an unexpected 3 points from February. The data showed a marked difference in perception based on political party affiliation, with 87% of Republicans expecting to be better off in the next five years. Illustrating the stark ideological disparities across the US, only 22% of Democrats expect better economic conditions ahead. The optimism, however, bubbles over in the form of increased spending, which drives a stronger economy. Uncertainty makes shoppers spend less, the report from the University of Michigan pointed out.
Euro – European Markets
The euro remains stronger following the Dutch elections and ahead of France’s presidential contest. At the recent G20 financial summit, finance ministers hoping to build strong trade relationships with new US Treasury Secretary Steven Mnuchin, permitted him to have a hand in shaping the agenda. They’re hoping that by showing flexibility Trump’s administration will have a more detailed and moderate trade plan when the G20 meet again in July. There was an early decision to remove a reference to financing a fight against climate change. Also, the US persuaded the G20 to drop a decade old pledge to resist protectionism. Meeting at German technology meeting today, Chancellor Merkel and Japanese Prime Minister Shinzo Abe made subtle statements criticising Trump’s protectionist trade rhetoric.
Today’s data release from Germany show the annual producer price inflation (PPI) has surged to a 5-year high of 3.1% in February. This increase in Europe’s largest economy of manufacturing prices matches the increase in consumer prices which were also up to 2.2% for February. This is above the European Central Bank’s target of just under 2%. The increased cost of energy, which had risen 5.4% from the previous February, pushed up inflation. The annual PPI, measuring the cost German manufacturers face, jumped up from 2.4% to 3.1% last month. These costs will be passed onto shoppers, increasing German inflation.
Other Currencies – Highlights
A G20 participant, Turkey, has been prominently featuring in recent news as Turkish President Tayyip Erdoğan’s row with the Netherlands spread like wildfire to a larger disagreement with Europe. It began as a refusal to allow Turkish ministers to campaign in Holland to influence some 400,000 Turkish voters towards supporting a bill that would increase the President’s power. Displeased with Prime Minister Rutte winning the Dutch elections, Turkey’s foreign minister claimed ‘holy wars will soon begin in Europe’. By Friday, after EU criticism by Angela Merkel and Francoise Holland, friction between Turkey and EU had escalated to the point that Turkey threatened to cease participating in a migrant deal with EU.
A year ago, the agreement between Ankara and Brussels to slow the progress of refugees from entering Europe gave Turkey €2 billion a year in exchange for returning refugees from Greek refugee camps to Turkey. Aid agencies report that the deal fails more than 14,000 refugees who suffer in squalid conditions. All of the political tension hasn’t hurt the Turkish economy which boasts the world’s 18th largest GDP. Germany is Turkey’s top export destination for exports including foods, textiles and manufactured equipment with an annual value of $150 billion. According to an advisor to President Erdoğan, the Turkish lira’s recent strength against the US dollar was expected to continue. The advisor said on Friday that the economy is on track to hit its targeted 4.4% growth figure this year, accelerating to 5% or more in 2018.