Sterling Struggling on Brexit Jitters
The Pound has been given a slight boost by today’s news that the UK’s second quarter GDP came in as expected at a rate of 0.3% growth. Sterling remains weakened, especially against the Dollar, by speculation that Brexit trade negotiations will not begin in October.
The Euro continues holding onto gains after yesterday’s robust manufacturing data raised the single market currency to its highest levels against the Pound in eight years. The European Central Bank (ECB) has expressed concerns that the Euro might be “overshooting” its value in the future. ECB chief Mario Draghi’s speech at the Jackson Hole conference tomorrow is unlikely to provide hints that the ECB is ready to adjust their stimulus spending since this would further strengthen the Euro.
Pound Sterling – UK Markets
The Pound has fallen by 0.08% to the US Dollar, exchanging at $1.27. Sterling regained a little ground lost to the Euro yesterday, improving today by 0.07% with the exchange rate €1.08.
Sterling has been battered by Brexit fears that trade negotiations will not begin in October. The five policy papers released this week do not address the financial settlement, the issue of the Irish border or EU citizens’ rights, which makes it more likely that the negotiations that resume next week will progress slowly. European Commission spokesman Alexander Winterstein commented yesterday that the EU “hope to make progress on the three main issues” which, he said, “the EU27 have set out and need to be clarified upfront.”
Today’s data release indicates the UK’s economy is meeting expectations, which has helped the Pound recover from yesterday’s fall against most of Sterling’s currency peers. The UK’s year-on-year Gross Domestic Product hit 1.7%, which had been expected by economists. The service sector grew by 0.5% compared to the second quarter last year, while construction fell by 1.3%, agriculture by 0.4% and production by 0.3%.
Business investment fell sharply after rising up 0.6% in the first quarter of the year, which was attributed to caution ahead of Brexit negotiations. However, a stronger than expected increase in capital investment is seen as an indication that investors have confidence in the UK’s long-term prospects.
US Dollar – US Markets
The US Dollar rose by 0.06% against Sterling today with the exchange rate at $1.27. The Euro slipped by 0.16% to the Dollar, trading at $1.17. The US Dollar Index (DXY), which measures the value of the US currency against six major currencies, is up by 0.24%, to 93.37.
The Dollar is holding steady on expectations that Federal Reserve Chair, Janet Yellen will open the door to discussing Quantitative tightening at the Jackson Hole summit when she speaks tomorrow morning. This may be Yellen’s last appearance at the summit because she may be replaced by president Donald Trump when her term ends in January. She is expected to discuss financial stability issues including the low rate of inflation and the dangers of investors taking greater risks that have recently driven up the US stock market.
Yesterday’s June housing price release showed an unexpected drop in new house sales. Sales fell to their lowest levels in seven months, triggering concerns of a slowdown in the housing market’s recovery. Economists had predicted an increase of 0.3% in growth in July, however, sales slipped by 9.4%. Sales fell by 8.9% year-on-year. Another indication that the housing market is slowing was a report from the Mortgage Bankers Association showing last week’s applications for mortgages had declined.
Euro – European Markets
Euro lost 0.08% of value to the Pound, exchanging at £1.08. Euro also fell 0.16% against the US Dollar, exchanging at $1.17. The Euro surged, especially against the Pound, yesterday, when the release of manufacturing PMIs showed that the Eurozone economy is expanding and outpacing the UK’s. Germany’s Markit Purchasing Managers Index (PMI) figures came in at 59.4. The UK’s 1 August manufacturing PMI release was 55.1, higher than the 54.4 figure that was expected after a previously low reading of 54.2. The lower value of the Pound is seen as a temporary boost to exports which support manufacturing during the brief period before any new trade tariffs might begin after Brexit.
European Central Bank (ECB) chief Mario Draghi’s speech at the Jackson Hole conference tomorrow will be carefully analysed by investors looking for clues about when the ECB plan to begin to unwind their stimulus programme. The Euro’s recent boost poses a challenge to ending the programme, however, the Euro is expected to rise further if Draghi indicates the ECB is ready to cut back on bond buying. It appears that the Eurozone economy has now recovered sufficiently to permit this adjustment.
Other Currencies – Highlights
The Pound gained 0.2% to the Australian Dollar, trading at £1.62. The Australian Dollar fell by 0.23% against the US Dollar, trading at 0.78AUD. The Euro to Australian Dollar rate is €1.49. Economists at the Australian and New Zealand Banking Group (ANZ) are delivering welcome news for the land down under: economic performance across much of Australia is picking up after a slow start to the year. The bank uses a visual chart known as “The Stateometer” to measure 37 economic indicators, including business and household activity, labour, housing and trade. Cherelle Murphy, ANZ senior economist said: “The Stateometer paints a picture of an economy moving closer to its tend rate in the June quarter.” ANZ economists see the best growth momentum in Queensland followed by Tasmania and Western Australia. The Northern Territory trails behind, due to negative ratings for housing and the labour market.
The Pound has risen by 0.24% to the New Zealand Dollar, exchanging at 1.77 NZD. The Kiwi to US Dollar exchange rate slipped by 0.24% to 0.72 NZD. The Euro to New Zealand Dollar exchange rate is €1.63. The Kiwi fell yesterday after the Treasury revised their June year-on-year 2017 GDP predictions from 3.1% down to 2.8%. Today, Statistics New Zealand released the news that the country had the first trade surplus for July in five years after exports of milk powder, butter and cheese increased by a massive 51% from June. Exports rose by 17% compared to the previous July, an increase of $4.63 billion in revenue. The July trade surplus of $85 million compared very favourably to last year’s July deficit of $351 million which was due to a large volume of aircraft imports.