New US Fed Chair Boosts Dollar
Sterling has been weakened by a series of adverse Brexit headlines that will likely continue in the week ahead. Today’s publication of EU’s draft treaty on Brexit shows that many areas of disagreement remain unresolved. There are also concerns about the consequences of leaving the customs union and disputes about the Irish border. The Pound could be strengthened on Friday by speeches that will be made by Bank of England governor Mark Carney and prime minister Theresa May.
The US Dollar surged to a three-week high after the new Federal Reserve (Fed) chair Jerome Powell’s upbeat assessment of the US economy raised the possibility of four rate hikes this year. Jerome Powell said he is more optimistic about the US economy since December, predicting several good years ahead with rising wages. Powell told the House Financial Services Committee that the Fed intends to strike a balance between “avoiding an overheating economy” and keeping “price inflation to 2% on a sustained basis.”
Pound Sterling – UK Markets
The Pound is steady against the Euro, exchanging at €1.13. Sterling is weaker against the US Dollar, with the exchange rate at $1.38.
Trade Secretary Liam Fox defended the government’s decision to leave the customs union with the EU after Brexit, saying that staying in would be a “sell-out” for Britain. Fox criticised Labour’s pledge to keep Britain in the customs union in his address which was part of the government’s road to Brexit cabinet speeches. Labour leader Jeremy Corbyn has said this week that his party seeks to negotiate a new comprehensive UK-EU customs union.
UK shop prices fell in February, a sign that inflation caused by a weaker Pound has reached its peak. According to today’s release by the British Retail Consortium, shop prices were 0.8% lower on an annual basis, more than the expected fall of 0.6% and December’s decline of 0.5%. Consumer confidence worsened slightly in February, according to a survey released today by GfK, showing a decline to -10 from January’s reading of -9.
Today is a quiet day for data releases, but the pace picks up briskly tomorrow. The IHS Markit Manufacturing Purchasing Manager’s Index for February is expected to slow from 55.3 to 55.0. While this is less output, it still indicates growth, since any result over 50 shows expansion. The Bank of England’s release of January’s Consumer Credit will probably show a decline in borrowing, since Monday’s mortgage release showed consumer credit card borrowing fell by 0.2%. Mortgage Approvals will likely be more than the forecast of 62,000, since the British Bankers Association figure this week was larger than forecast.
US Dollar – US Markets
The Euro has fallen against the US Dollar, exchanging lower at $1.22. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is up, at 90.54.
New Federal Reserve chair Jerome Powell has said he thinks the US economy has improved since December, however, a series of lacklustre data releases out this week indicate that US economic growth slowed in the beginning of the year. Wholesale Inventories increased to 0.7% in January, indicating that unsold inventory continues rising following December’s revised reading of 0.6%.
Durable Goods Orders contracted by 3.7% in January, surpassing the expected fall by 0.2%. This category includes items ranging from appliances to aircraft which are expected to last for three years or more. Boeing reported that it had only 28 aircraft orders in January, after 265 in December. The Commerce Department also reported that demand for transportation equipment plunged by 10%. Durable Goods Orders had their biggest decline in 6 months, following a 2.6% increase in December.
The most upbeat release was yesterday’s Richmond Fed Manufacturing Index for February which smashed expectation of increasing modestly from January’s reading of 14 up to 15. The surprising reading of 28 is the second highest figure on record.
Tomorrow Fed chair Jerome Powell’s speech will be closely followed for signs of his intentions to raise interest rates. The major data releases will be the annual Gross Domestic Product (GDP) which is expected to have slowed to 2.5% in the fourth quarter. Core Personal Consumption Expenditures, a key inflation indicator, are likely to have increased to 1.9%.
Euro – European Markets
The Euro is holding steady against the Pound, with the exchange rate set at £0.87.
Germany’s record-low 5.4% unemployment rate continues, showing the labour market is at its strongest level in 25 years. February’s Unemployment Change dropped by 22,000, beating the expected decrease of 15,000. According to the Federal Employment Agency, the total number of jobless persons in the Eurozone’s largest economy was 2.546million in January.
Eurozone inflation slowed to 1.2% as had been expected, according today’s Consumer Price Index. Core inflation held stable at 1.0%. German inflation is weaker than expected, according to yesterday’s Harmonised Index of Consumer Prices (HICP). The year-on-year HICP for February slipped to 1.2%, from January’s reading of 1.4%, missing the 1.3% forecast. The Consumer Price Index dropped to 1.4%, lower than the expected 1.5%, and the previous rate of 1.6%. Germany’s Harmonised Index Consumer Prices was expected to rise to 0.6%, following January’s drop to -1.0%, but it came in lower at 0.5%.
Eurozone economic confidence slipped in February, marking a second month of decline, as had been expected. The European Commission’s index dropped from 114.9 to 114.1. This is a softening from December’s 17-year high. The business climate reading also declined to the lowest levels since October. February’s Services Sentiment beat forecasts, coming in at 17.5. German business confidence fell the most in more than 5 years in February.
Other Currencies – Highlights
Sterling has fallen to the Australian Dollar, with the exchange rate at 1.77 AUD. Australia’s Private Sector Credit grew by 0.3% on a monthly basis and 4.9% annually, marking the slowest annual increase since May 2014. Housing credit also slowed to 3%, due to less lending to investors.
The Pound has slipped against the New Zealand Dollar, exchanging at 1.91 NZD. New Zealand’s widening trade deficit could leave the country with a widening current account deficit, as increasing levels of money leave the economy, compared to the amounts that are coming in. This increases the risk of having to rely on foreign capital.
Sterling has dropped to lower the Japanese Yen, exchanging at 148.70¥. Japan’s economic minister says he expects consumer spending to continue rising but he will also monitor the impact of accelerating inflation on consumer sentiment, after Japan’s consumer price index rose in January.