Inflation Surge Strengthens Sterling
The pound fell from a 3-week high against the dollar on yesterday’s news that the UK will trigger Article 50 on 29 March. Economists predict that Brexit related volatility will shape the road ahead of us for the next 2 years. Today Sterling rallied in response to this morning’s consumer price index reports showed inflation surged by more than expected.
US President Donald Trump’s speech yesterday at his rally in Kentucky promoted the much-doctored Republican healthcare plan ahead of the bill’s vote this week. In a Congressional hearing, the FBI said the US President’s accusations of being wiretapped were unfounded, but they’re investigating him for his campaign’s Russian ties.
Pound Sterling – UK Markets
The pound rose on today’s busy data releases featuring a look at inflation which came in above the expected 2.1%. The rise to 2.3% is the highest level since September 2013. The rise from January’s 1.8% was due to increased prices for fuel and food. The rising prices pushed inflation past the Bank of England’s target of 2%, but the bank isn’t likely to tamper with interest rates. Inflation had been predicted to reach 3% this summer, but this figure may be revised. Sterling’s benefitted from the expectation that the bank will be pressed to raise interest rates from the record low of 0.25% in the coming months. Also, the government’s borrowing fell to the lowest February levels since 2007, down to £1.8. For the financial year to date, the government borrowed £47.8 billion, which was £19.9 billion less than last year.
Yesterday, the pound hit a 3-week high against the weak dollar, before it fell when the government provided the date for its plans to trigger Article 50 next Wednesday on 29 March. The reaction shows the market seems to react negatively to any Brexit news. Many economists expect Sterling could shed as much as 10% of value when Article 50 is triggered, although the markets may have priced this in, by now. European Council President Donald Tusk said he’s prepared for the UK triggering Article 50 and will present his draft of the Brexit guidelines to the EU27 member states within 48 hours of the historic event.
US Dollar – US Markets
Oil prices decreased because, adding to the market’s surplus, the US is increasing production. Last week, US drillers increased the number of active oil rigs to 631, the highest number since 2015. The decline in oil prices and Trump’s protectionist stance on trade at the weekend’s G20 financial summit gave an air of uncertainty to the US markets at the start of the week. Wall Street opened lower on the news as well as the political uncertainty prompted by the FBI and National Security Administration testifying before Congress yesterday. The open hearing found no evidence proving that President Trump’s claim that he was spied on by a British spy agency under the orders of former President Obama. The FBI confirmed that Russian hackers influenced the US elections and said that there has been an ongoing investigation since July into both Russia’s actions and Trump’s campaign.
Secretary of State Rex Tillerson’s visit to China proved successful in arranging a meeting between US President Trump and Chinese President Xi Jinping. The leaders of the world’s 2 largest economies agreed to work together to resolve rising tensions with North Korea. President Trump has behaved unpredictably toward China, most recently criticising the country for doing too little to block North Korea’s nuclear weapons programme. He’s attacked Beijing over the $347 billion trade deficit the US has with China, blaming them of being the ‘grand champions’ of currency manipulation. Tillerson plans to attend the Chinese president’s 2-day meeting at Mar-a-Lago resort on 6-7 April. He’ll then sidestep his first NATO meeting, prioritising a Moscow visit. He was chosen for his role because he’s worked closely with the Kremlin as a top Exxon Mobile Corporation executive. President Trump has criticised NATO as ‘obsolete’, pressing other members to spend at least 2% of their GDP to fund EU defence.
Euro – European Markets
The euro was already strengthening against the US dollar this week as the dollar remains weak after the US Federal Reserve didn’t indicate a 4th interest rate hike this year. Euro rose to a 6-week high this morning after centrist candidate Emmanuel Macron’s strong showing in last night’s presidential debate. A poll showed that anti-euro candidate Marine Le Pen failed to convince as many voters to support her as Macron did. The euro has been strengthening since the European Central Bank indicated a willingness to raise interest rates before concluding its bond buying programme.
Yesterday, a German government appointed panel known as the ‘wise men’ released their projections for Germany’s economy. They agreed with German finance ministers that the European Central Bank (ECB) should begin winding down its bond buying programme ‘as soon as possible’, in an effort to persuade the ECB to consider raising interest rates. Germany’s economy has recovered, thanks to the ECB’s expansionary monetary policy, and Germany is now ready to return to a normalised monetary policy. The ‘wise men’ anticipate GDP rising for 1.3% last year to 1.4% this year, followed by a jump to 1.6% in GDP next year.
Greece will miss another bailout deadline, according to finance ministers meeting in Brussels on Monday. The government isn’t following the terms stipulated when it secured emergency loans, as Prime Minister Tsipras refuses to make the additional cuts lenders demanded. The Slovakian finance minister tweeted that the situation is like the film ‘Groundhog Day’ as negotiations repeat the well-rehearsed pattern of returning to Athens for another adjustment.
Other Currencies – Highlights
Both down under dollars have been making gains against their US contemporary until very recently. The Australian dollar managed to stay strong in spite of a disappointing jobs release last week, largely because the US dollar softened after the Federal Reserve seemed more cautious than expected when raising interest rates. Australia’s unemployment rate rose from 5.7% to 5.9%, when it had been expected that the economy would add 16k jobs in February but actually lost over 6k jobs. A spokesperson for Australia’s Bureau of Statistics, Jacqui Jones said that the underemployment rate is ‘historically high’ although its ‘relatively unchanged over the last 2 years.’ Another gauge of the economy’s health is steadily rising inflation, so it’s worrisome that consumer inflation expectations fell from 4.1% to 4.0% in March.
The Australian dollar dropped today on the Reserve Bank of Australia’s (RBA) concerns about a ‘build-up of risks associated with the housing market’. This was the most explicit language the RBA has used, although it has warned about increased borrowing as investment borrowing continues to fuel the high house prices in Sydney and Melbourne. Today’s house price release shows average prices rose 4.1% in the last quarter of 2016. The figures reveal that average property prices have risen by 70% over the last 5 years, while wages grew by only 13%.