Sterling Stronger on Rate Hike Expectation
Sterling was boosted by Bank of England deputy governor David Ramsden suggesting interest rates will soon rise. Speaking in Coventry, Jeremy Corbyn is expected to say that Labour wants “a bespoke relationship” with the single market after Brexit. Corbyn’s statement will likely increase the chances that prime minister Theresa May could be defeated on this issue when the Commons votes in the spring. Also, a speech by Bank of England’s Sir John Cunliffe will be closely watched for further hints regarding the BoE’s monetary policy. The rising expectation that the BoE will raise interest rates by 0.25% in May, and increased optimism regarding Brexit have lifted the Pound.
The US Dollar is weaker, following a strong performance last week. One of the key US events ahead this week is the appearance of Jerome Powell, the new chair of Federal Reserve at the Congress on Tuesday and the Senate on Thursday. Powell is expected use these hearings as an opportunity to introduce his monetary policy assessment and plans. The Euro slipped after Friday’s Eurozone CPI showed that inflation remains sluggish, since it delays the European Central Bank’s plan to alter their monetary policy.
Pound Sterling – UK Markets
The Pound is stronger against the Euro, exchanging at €1.13. Sterling is also higher against the US Dollar, with the exchange rate at $1.40.
Jeremy Corbyn will be setting out the Labour party’s commitment to keep the UK in the European customs union after Brexit, in his speech today. Corbyn is expected to argue the case for having a relationship with the single market that involves “protections, clarification or exemptions” that would ensure that EU law does not obstruct a future Labour government. The prime minister faces a challenging alliance by Labour, other opposition parties and Tory rebels when voting takes places in the spring on this key issue.
Uncertainty about extent to which the UK’s weak productivity will improve in the coming years is a key consideration for the Bank of England’s (BoE) monetary policy, BoE’s deputy governor Sir David Ramsden said on Friday. In his speech at Camden on the topic of productivity, Ramsden said the “dampening effect of Brexit on productivity growth,” in the short-term and beyond, will probably continue for some time. Ramsden told the Sunday Times that he sees “the case for rates rising somewhat sooner rather than somewhat later.”
UK mortgage approvals have risen from a four-year low, according to today’s release by the British Bankers Association. January’s 40,117 approved mortgage loans were up, for the first time in four months, from December’s 36,085, which marked the weakest figure since April 2013. UK mortgage approvals are 4,000 weaker than they were in January of last year. January’s figures include homeowners who re-mortgaged their homes in order to “lock in” the current low interest rate before the Bank of England raises borrowing costs, as is expected in May.
With Brexit trade talks starting next month it is likely that the Brexit stance the government decided on at Chequers last week will be rejected by Brussels. The UK decided to maintain a “three baskets” strategy, the prime minister previously hinted at in her Florence speech. This approach is to follow EU rules in some areas, diverge slightly from them in others and break clear of them in other areas. However, prior to the Chequers meeting, the EU rejected this approach as cherry-picking, saying it poses a “risk for the integrity” of the single market.
US Dollar – US Markets
The Euro has risen to 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 89.59.
Today’s US data release begins with the Chicago Fed National Activity Index for January which is expected to slip to a reading of 0.15 from December’s robust activity level of 0.27. Later, New Home Sales for January are expected to have increased to 0.645million up from 0.625million for December.
The Federal Reserve will be in the spotlight this week as the new Federal Reserve chair Jerome Powell delivers his first testimony to Congress, tomorrow, 27 February. St Louis Federal Reserve (Fed) President James Bullard will give a presentation on the US Economic and Monetary Policy at a conference in Washington, today. Several Fed members including William Dudley have stated their willingness to allow inflation to rise above the 2% target, before adjusting interest rates.
Aside from the key Federal Reserve perspectives, the other critical data due out this week begins on Wednesday when the US Gross Domestic Product (GDP) for the fourth quarter is expected to come in at 2.5%. Also, the preliminary Core Personal Expenditures (PCE) Prices, which are the Federal Reserve’s preferred inflation gauge are out. The PCE is expected to rise from 1.3% to 1.9%. On Thursday, more PCE data is released, as well as the IHS Markit Manufacturing Purchasing Managers Index for February.
Euro – European Markets
The Euro has weakened against the Pound, with the exchange rate set lower at £0.87.
The Euro could be challenged by the outcome of the Italian election on 4 March. Opinion polls indicate there will be no clear winner which suggests a loose coalition or minority government is likely to emerge to govern Italy. Also, on the same day, the German Social Democrat, (SDP) postal vote results will be announced, determining whether SDP members will join the coalition government with Chancellor Angela Merkel.
Mario Draghi, president of the European Central Bank (ECB), will be testifying to the European parliament in Brussels, today. Draghi will be closely watched for any statement he might make regarding the ECB’s monetary policies. Danske bank has said it is unlikely that Draghi “will reveal new thoughts on the revisit of forward guidance,” but he could give hints during the lengthy hearing. ECB’s Benoit Coeure will also be making an address at an event in Frankfurt, Germany.
On Friday, the Eurozone Consumer Index showed that inflation was down to 1.3% in January after December’s rate of 1.4%. Stubbornly low inflation prevented the European Central Bank from making even a token adjustment to their monetary policy, although the markets expect the bank’s unprecedented €2.55trillion asset purchase programme to expire this year.
Other Currencies – Highlights
Sterling is steady against the Australian Dollar, with the exchange rate at 1.78 AUD. Australia’s economy seems to be accelerating at a 2.75% rate over most states and territories, according to ANZ Bank. The Reserve Bank of Australia has forecast GDP will grow above 3% this year and next.
The Pound has slipped against the New Zealand Dollar, exchanging at 1.91 NZD. Later today, New Zealand’s Trade Balance figures for January are due for release. These are crucial releases since international trade accounts for around 60% of the country’s economic activity.
Sterling has risen against the Japanese Yen, exchanging at 149.78¥. Japan’s Leading Economic Index for December rose to 107.4, missing the forecast figure of 108.3. December’s Coincident Index also indicated that Japan’s economy contracted slightly at the end of last year.