New US Fed Chair in Spotlight
The Pound weakened yesterday after prime minister Theresa May’s spokesperson said the UK will not be joining a customs union with the EU after Brexit. The government’s comments were in response to Labour leader Jeremy Corbyn saying his party favours a new UK-EU customs union to ensure tariff-free trade. In spite of Brexit uncertainties, Sterling has been supported by expectation that the Bank of England (BoE) may raise rates as many as three times this year. BoE governor Mark Carney’s speech on Friday will be watched for signals regarding the potential interest rate hikes.
The US Dollar could strengthen today, if new Federal Reserve (Fed) chair Jerome Powell suggests that he is open to raising interest rates faster than his predecessor Janet Yellen was. Powell has his debut as the Fed chair as he testifies before Congress for the Semi-annual Monetary Policy Report. The Euro was weakened by European Central Bank president Mario Draghi’s call for patience in allowing inflation to rise before altering the ECB’s monetary stance.
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 $1.39.
Labour leader Jeremy Corbyn said that his party backs negotiating a new comprehensive UK-EU customs union. Corbyn said that Labour respects the referendum vote to leave the EU, but said his party does not “support any Tory deal that would do lasting damage to jobs, rights and living standards.” In response, the government has said it would not stay in the customs union, however, Labour’s opposition could force the government to alter its position.
Yesterday’s report from UK Finance showed that UK businesses reduced their levels of borrowing in January. Businesses had bank debts of £263.9billion in January, which was 1.4% less than they had been the previous January. This first drop in borrowing since 2015 has been blamed on caution about committing to new projects due to Brexit uncertainty.
Although January’s mortgage approvals rose by 9.7%, 2018 is likely to be a difficult year for the UK’s housing market. Rising interest rates, decreased purchasing power caused by inflation and sluggish wage growth, combined with Brexit uncertainty are expected to keep prices from rising past 2% this year. Howard Archer of EY noted that “the fundamentals for house buyers are likely to remain challenging.”
US Dollar – US Markets
The Euro has climbed against the US Dollar, exchanging at $1.23. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is down, at 89.78.
New Federal Reserve chair Jerome Powell delivers his first testimony to Congress, today. Due to the size of the US economy, Powell has been called “the most important economic policymaker in the world.” Recent market volatility has been caused by uncertainty about his plans to raise interest rates. If Powell indicates he intends to raise rates further than has been expected, the markets will be impacted.
Yesterday, St Louis Federal Reserve President James Bullard expressed concern about raising interest rates rising “too far, too fast,” arguing that the US is in a low-growth and low-inflation cycle. Bullard says rates should not rise much further, if at all, until data changes. Raising rates risks creating a “restrictive” policy setting, he said.
New Home Sales for January fell to 0.593million after they were expected to have increased to 0.645million up from 0.625million for December. This brought the New Home Sales Change sharply down to -7.8%, following December’s decrease to -7.6%, rather than the 3.2% increase that had been forecast. Today, annual housing prices from December will be seen in the S&P/Case Shiller Home Price Indices and December’s Housing Price Index.
Euro – European Markets
The Euro has recovered against the Pound, with the exchange rate set at £0.88.
The Euro dropped briefly after Mario Draghi, president of the European Central Bank (ECB), indicated the central bank is in no rush to taper their stimulus programme. Draghi reiterated his message that patience and persistence is needed to allow the central bank to achieve their primary objective of letting inflation rise to the 2% target.
UBS has upgraded its economic forecast for France from an expectation that GDP would rise by 1.8%, up to 2.3%, this year. Next year’s GDP was upgraded from 1.6% to 2% due to the increased business optimism after president Emmanuel Macron’s ambitious reforms renewed confidence and increased investment.
Germany’s inflation rate will be seen later today when Destatis releases the Harmonised Index of Consumer Prices. Year-on-year prices are forecast to fall to 1.3% for February, down from 1.4%, due to seasonal factors. Germany’s Harmonised Index Consumer Prices is expected to rise to 0.6%, following January’s drop to -1.0%. Tomorrow Germany’s Unemployment Change is likely to have dropped by 15,000 after January’s record-low unemployment rate showed the country’s labour market is the strongest it has been in 25 years.
Other Currencies – Highlights
Sterling has strengthened to the Australian Dollar, with the exchange rate at 1.78 AUD. House prices in Australia stopped falling last week, according to data released by CoreLogic. ANZ bank noted there is “evidence that the slowdown in house prices is stabilising,” although they expect annual house prices will continue to slow.
The Pound is holding steady against the New Zealand Dollar, exchanging at 1.91 NZD. The New Zealand Dollar fell after a larger than expected trade deficit of $566million for January. Trade Balance figures also showed annual exports rose by 9%, while imports grew by 17%.
Sterling has dropped to the Swiss Franc, exchanging lower at 1.30 CHF. The chairman of Switzerland’s stock exchange, Romero Lacher has said there are “a lot of upsides” to releasing a crypto version of the Swiss Franc, saying that the organisation would be “very supportive of the idea.”