Euro Rises on Strong German Data
The Pound has dropped to a new eight-year low against the Euro as the prospect of delayed trade negotiations increases. The release of policy papers this week is considered a good start, but EU officials don’t seem satisfied with the progress made on financial obligations and citizens’ rights. This doesn’t bode well for next week’s round of negotiations.
European Central Bank (ECB) chief Mario Draghi’s first speech of the week at Lindau Germany’s meeting on economic sciences didn’t touch upon ECB’s monetary plans. The positive German and Eurozone Manufacturing Purchasing Managers Indexes that were released, rapidly drove the value of the Euro higher, especially against the Pound.
Pound Sterling – UK Markets
The Pound has lost 0.23% to the US Dollar, trading at $1.27. The Sterling to Euro rate dropped by 0.4%, with the exchange rate slipping to €1.08.
Brexit uncertainty is the main reason why the Pound has performed poorly against nine of its group of ten currency peers. This week’s release of formal policy papers is an attempt by the government to persuade the EU to move onto the next phase of trade negotiations. Yesterday’s civil judicial paper revealed the UK’s hopes for “close co-operation” with the EU to resolve cross border disputes that arise after Brexit. The UK’s position as a “global legal centre” for commercial contracts is at risk from competing countries, if this is not agreed before Brexit.
Today’s release addresses the future role of the European Court of Justice, whose rulings the UK proposes to respect until March 2019 and possibly longer. Theresa May has said that giving Britain complete control over its own laws was one of her “red lines,” but yesterday’s paper was criticised for allowing European judges to rule on British citizens and businesses in cross-border disputes.
The Confederation of British Industry’s (CBI) survey of 4332 manufacturers indicates that the weak Pound continues boosting British exports. The CBI reported that the monthly industrial order book balance increased to +13, from July’s +10 reading. Expectations for a higher volume of output in the next three months rose to the highest levels since March. This report matches the data from IHS Markit purchasing managers index which rose sharply in July on “strong inflows of new work.” There are no UK data releases today, but tomorrow’s UK GDP release could further weaken the Pound.
US Dollar – US Markets
The US Dollar’s rise yesterday weakened the Pound when it fell by 56% to the Dollar. Today the Pound is down by 0.23%, exchanging at $1.27, marking the first time it has fallen below $1.28 since June. The Euro rose by 0.17% to the Dollar, for an exchange rate of $1.17. The US Dollar Index (DXY), which measures the value of the US currency against six major currencies, fell by 0.010%, to 93.33.
The Dollar’s rally was temporarily slowed by President Trump’s comments at a rally with his supporters in Phoenix, Arizona, but markets quickly turned their attention towards the Federal Reserve’s stance at Jackson Hole later this week. The US government requires Congressional approval to increase borrowing so that the government can pay bills to avert a shutdown in October. Renewing his pledge to build a Mexican border wall, Trump said,” If we have to close down the government, we are building that wall.” He also said he might end the North American Free-Trade Agreement.
US stock markets rebounded from recent weekly declines as Dow Jones industrials recorded their largest single day gain in almost four months, an increase of nearly 200 points, yesterday. The S&P 500 and Nasdaq also saw their best session in months due to a Politico report that indicated Trump’s aides are making steady progress with lawmakers on his tax-reform proposal.
Euro – European Markets
Sterling slipped to the surging Euro, by 0.39% today, falling to £1.08. The Euro rose against the US Dollar by 0.17%, exchanging at $1.17.
Mario Draghi’s academic speech in Landau Germany this morning sidestepped any hint of the ECB’s monetary policy plans, so it played no role in the Euro’s movements today. Global markets have priced in a 70% chance that the ECB will raise interest rates by the end of 2018, so his comments at Jackson Hole will attract international market attention.
The Euro was strengthened by positive economic data releases today. Germany’s manufacturing HIS Markit Purchasing Managers Index (PMI) figure show that Europe’s biggest economy is performing even better than expected. July’s PMI’s were 58.1 and August’s smashed the 57.7 expectations coming in at 59.4. Germany’s services sector was also higher than had been anticipated.
Europe’s Markit Manufacturing PMIs also surpassed expectations they would drop from July’s reading of 55.7 down to 55.5, but it rose to 55.8. August’s services in the Eurozone unexpectedly fell from a previous level of 55.4 down to 54.9. France’s services PMIs also declined from 56.0 to 55.5, which is the lowest reading since January.
The Euro won’t hit parity with the Pound, because prospects for the EU’s economic growth are exaggerated, according to research by Pantheon Macroeconomics. Pantheon’s chief UK economist Samuel Tombs notes that rising first and second quarter growth is “virtually guaranteeing that year-on-year growth will exceed 2% this year for the first time since 2010.” He sees this as unsustainable and thinks that the Pound will begin rising against the Euro as the UK moves towards a more conciliatory Brexit stance. Tombs sees Sterling recovering “to about €1.23 by the end of 2018 and €1.27 by the end of 2019.”
Other Currencies – Highlights
The Pound gained a slight 0.1% to the Australian Dollar, trading at £1.62. The Aussie lost 0.28% of value against the US Dollar, trading lower at 0.78AUD.
July’s Westpac Melbourne Institute Index of Consumer Sentiment came in at -1.2% for July, the ninth straight month of pessimistic readings. Westpac’s chief economist Bill Evans commented: “The survey detail suggests increased pressures on family finances.” This pressure comes from wage growth of 1.9% being nullified by the same rate of inflation. The Australian Reserve Bank governor has said that “the strengthening of labour markets will eventually lead to wage growth picking up.” He appreciated the difficulty that waiting poses for many households, saying the bank hasn’t “given up hope that eventually it will come right.”
The Pound has gained 0.77% against the New Zealand Dollar, trading at 1.76 NZD. The Kiwi to US Dollar exchange rate fell by 56% to 0.72 NZD and the Euro to New Zealand Dollar exchange rate is €1.60.
Yesterday, Trade Minister Todd McClay presented New Zealand’s “boldest-ever trade push” which would complete or start seven free trade deals. The Labour party criticised the government’s trade record, calling the newest trade policy “National’s wish list of deals.” National intends to establish free trade agreements with a number of countries, including the UK after Brexit. Labour’s trade spokesman David Parker noted the government’s failure to complete a deal with the Gulf States after spending $11.5 NZD to fly nearly 1,000 sheep to Saudi Arabia. He said “it looks like they’ve wasted $12 million on the dodgy Saudi sheep deal.”