Pound Slips After Leaked Brexit Paper
Sterling has fallen to a one-week low of $1.40 against the Dollar this morning, after a leaked government paper showed the UK would be economically worse off under the three most likely Brexit scenarios. The news comes as political uncertainties dominate the start of the week, including the EU withdrawal bill being debated in the House of Lords today. The Bank of England (BoE) December Consumer Credit figures surpassed expectations, as British consumers borrowed an additional £1.5bn last month. Also, UK Mortgage Approvals in December fell to the lowest levels seen since January 2015.
The EU’s GDP figures released today show the region’s economic growth is expanding at its strongest rate in a decade. The quarterly growth rate of 0.6% was helped by strong growth in France and Spain. France’s GDP growth of 0.6% slightly surpassed the UK’s increase of 0.5%, and Spain’s GDP showed steady economic momentum. By contrast, the UK’s GDP rate of 1.5% is considerably lower than the EU’s 2.7% GDP rate and the US’s 2.5% rate of growth.
Pound Sterling – UK Markets
The Pound continues sliding against the US Dollar, with the exchange rate down to $1.40. Sterling also weakened slightly to the Euro, trading at €1.13. Sterling weakness is largely due to the Dollar rising and a worrisome leaked government Brexit paper.
A leaked government document titled: EU Exit Analysis-Cross Whitehall Briefing compares the economic impact of a series of three likely Brexit scenarios. If there is no Brexit deal, the paper predicts the economy will grow 8% more slowly over the next 15 years than it would have had the UK remained in the EU. The document indicates that growth would be 5% lower if the UK negotiated a free trade deal, and 2% lower if the UK adhered to the rules of the single market. In response, the government has said that its preferred bespoke trade deal was not analysed, and the UK economy will not be worse off.
Just 61,039 UK mortgages were approved in December, which was a decrease of 3,000 from November’s approval rating. The BoE figures also show that people in the UK are borrowing at a higher annual rate, as credit growth rises up from 9.3% to 9.5%. The UK’s unsecured credit boom had been slowing, so this report marks a reversal of that trend. British consumers increased their credit borrowing by £1.5billion in December, which indicates that households are increasing debt in order to make ends meet.
As Brexit transition negotiations draw nearer, the EU’s General Affairs Council has shown it is able to agree to decisions much faster than the UK can. It took the council less than two minutes to decide that the terms of the transition and that these guidelines for the Brexit transition would last until 31 December 2020. The council of EU27 ministers agreed that the UK would be required to implement new EU laws during this transition, without voting on them. Chief negotiator Michel Barnier has also said he was not happy with extending the Brexit deadline past October, after Brexit secretary David Davis said the government was aiming at concluding the deal in “the last quarter of the year.”
US Dollar – US Markets
The US Dollar has picked up some strength against the Euro, with the exchange rate set €0.80. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is slightly lower, at 89.16.
The Dollar is steady, ahead of president Donald Trump’s first State of the Union address, later today. Trump has promised “a big speech, an important speech,” in which he is expected to announce a plan to rebuild ageing infrastructure. As is traditional, both parties will present guests that underscore political points each wishes to highlight. Trump’s guests will feature a worker benefiting from tax cuts; Democrats will introduce undocumented immigrant “Dreamers” who face the threat of deportation under Trump’s policies. In a break from tradition, the names of people who donated to Trump’s re-election campaign will be flashed across his campaign website.
Yesterday, December’s Personal Consumption Expenditure (PCE) figures reveal that Americans are saving at the lowest rate since 2005. The 2.4% saving rate was attributed to low unemployment, the promise of lower taxes and the rising values of homes and stocks. Spending increased to a seasonally adjusted 0.4% in December, less than economist’s predicted figure of a 0.5% rise after spending in November was up by 0.8%. Momentum continues in consumer spending, which accounts for over two-thirds of the US GDP. The value of goods and services produced in the US rose at a 2.6% annual rate in the fourth quarter of 2017.
The Commerce Department’s Price Index report is seen by the Federal Reserve (Fed) as their preferred inflation indicator. The price index for personal consumptions expenditures rose 0.1% from November and it was up to 1.7% from the year earlier. Inflation had reached the Fed’s 2% target in February of 2017, but has since fallen short of that goal. This makes it unlikely that the Fed will alter short term interest rates after they meet today and tomorrow to discuss monetary policy and welcome new Fed chair Jerome Powell who replaces Janet Yellen.
Euro – European Markets
The Euro has risen against the US Dollar, with the exchange rate set at $1.24. The Eurozone’s upbeat GDP releases out today might prove to strengthen the single market currency.
Eurostat’s GDP figures show the Eurozone has had its strongest annual growth in a decade. Economic expansion was at an annual rate of 2.5% with steady growth of 0.6% for the fourth quarter of 2017. Also, third quarter GDP growth was revised up to 0.7% from 0.6%. In other data, January’s Consumer Confidence reading was steady, unchanged from the previous reading. Service and Economic Sentiment were lower as was Industrial Confidence and Business Climate. Later today, Germany’s inflation rate will be seen in the Harmonised Index of Consumer Prices data.
France’s economy grew by 0.6% last quarter, slightly outpacing the UK’s growth rate of 0.5%, according to today’s report by INSEE. French GDP was 1.9% for 2017, the highest level seen since 2011. Investment is up by 9% in two years as French firms increase spending on equipment, offices and factories. This reflects a renewed confidence about the country’s business prospects.
Spain’s GDP rose by 0.7% in the last quarter of 2017, slowing down slightly from the expansion rate of 0.8% in the previous quarter. The annual rate of 3.1% was unchanged from GDP growth in 2016, marking Spain as one of the Eurozone’s faster growing members. Italian consumer and business confidence is slightly lower, according to a Istituto nazionale di statistica survey released today.
Other Currencies – Highlights
Sterling is holding steady against the Australian Dollar, exchanging at 1.74 AUD. Today’s National Australia Bank’s Business Conditions for December were a slight improvement over the previous reading, but fell short of an expected stronger increase. Likewise, the Business Confident reading as came in higher but missed the anticipated reading.
The Pound is exchanging higher to the New Zealand Dollar, trading at 1.92 NZD. December’s Trade Balance figures were boosted by a strong export performance, with a trade surplus of $640million which was much better than the expected deficit of $125. This followed a large trade deficit of $1.2billion in December which was caused by a large one-off import figure.
The Pound has fallen lower to the Swiss Franc, the exchange rate set at 1.31CHF. The Swiss Trade Balance figures for December show the trade surplus fell slightly to 2.5billion CHF from November’s 2.6billion CHF. For 2017, the total trade surplus was 34.8billion, compared to 36.9billion in 2016, according to the report by the Federal Customs Administration.