Strong Sterling Sails into New Year
The Pound was broadly strengthened by an upbeat report by the Confederation of British Industry (CBI), showing Britain enjoyed its fastest business growth since 2015 in the last quarter of the year. The CBI reported that a majority of businesses enjoyed levels of output they categorised as “above normal” in the period from October through December. Unfortunately, the TUC has said that UK wage growth will drop to from 32nd place to the bottom of the Organisation for Economic Cooperation and Development’s list of wealthy nations.
The weakened US Dollar wasn’t lifted by several lacklustre data releases that came out during the week. The Labour Department reported that Initial Jobless figures for the week ending on 22 December had been expected to fall to 240,000, but instead remained at the previous level of 245,000. Also, the US Goods Trade balance for November was below projections, with a deficit slightly under $70bn. This marks a slight increase from the $68.1bn deficit in October.
Pound Sterling – UK Markets
The Pound has performed especially well against the weak US Dollar, with the exchange rate rising to nearly $1.35 for a three-week high. Sterling has also remained resilient against the Euro, with the exchange rate set at €1.12.
The Confederation of British Industry reported an increase in growth from the low level of +6 previous year, up to a reading of +19 was seen as evidence that the UK economy is rebounding. The CBI survey polled 642 businesses across distribution, manufacturing and services to gauge sentiments about current and future expectations of activity. Only 19% of businesses polled reported business activity was below average levels.
This positive news was tempered by the CBI’s head of economic intelligence, Anna Leach warning of pessimism for the future. “private-sector firms are enjoying healthy activity levels as we approach the year end, but mediocre expectations for growth underline the ongoing challenges facing companies” Leach said. Also, according to the TUC, British workers will face the worst wage growth of any wealthy nation next year, when wages decrease by 0.7% after factoring for rising inflation.
Today, 45 confidential government files pertaining to Britain’s European policy in the 1990’s were due to be released to the National Archives at Kew, however 13 are being retained the Cabinet Office. One file that is being held back, details the creation of the Euro currency. Among those released are Margaret Thatcher’s, warning John Major not to make the same error Winston Churchill had when setting the parity for the Pound prior to the Euro being launched. Her warnings to her successor as prime minister were 20 months prior to the Pound crashing out of the European exchange rate mechanism on “Black Wednesday.”
Nearly half of UK holiday shoppers spent less this year than they had last Christmas, according to a survey of 2,000 people by research consultancy Retail Economics. A quarter of respondents have no plans to indulge in January sales either, because they had already made purchases during Black Friday sales. Over a third of shoppers made purchases on Amazon which was the top retailer as two in three shoppers bought gifts on line. Monitoring service Springboard reported that, on Boxing Day, high street footfall decreased by nearly 6% from last year.
US Dollar – US Markets
The US Dollar has dropped sharply to most major currency pairs, falling against the Euro with the exchange rate down to €0.83. The US Dollar Index (DXY) is down to 92.32. The Dollar’s decline contributes to its largest yearly loss since 2003 and its first yearly loss since 2012.
Yesterday, the US Census Bureau announced the US Goods Trade Balance figures for November which showed that the trade gap had widened to a deficit of $69.7bn, missing the expectation that it would be reduced from the previous figure of $68.1. Exports of goods during November totalled $133.7bn, an improvement of $3.8bn over October’s figures. However, at $203.4bn, November’s imports were $5.4 higher than those in October.
Initial and Continuing Jobless Claims were expected to show fewer jobless claims in December, after the last reading rose by 20,000 claims. The figures released by the Labour Department of 245,000 Initial claims was not a change from the previous reading, and Continuing claims were likewise unchanged, which is an indication of a strong labour market. For over two years, the US has maintained jobless benefit figures at under 300,000, the benchmark of a robust labour market. As claims have remained near the lowest levels seen in over 40 years, employers are seen to be retaining qualified workers, rather than reducing their staff.
Euro – European Markets
The Euro has gained ground against the weaker US Dollar, with the exchange rate set at $1.19. The Euro has weakened to the Pound, exchanging at €0.88. Later today, Destatis will release the Eurozone’s Harmonised Index of Consumer Prices.
Italian president Sergio Mattarella, has dissolved parliament in preparation for a 4 March general election. The government’s centre-left Democratic Party (DP) is facing challenges from anti-establishment party Five Star, which according to polls, has the most public support. The anti-immigration right wing party Forza Italia, led by former premier Silvio Berlusconi is also gaining support. It is unlikely that any party will win a majority and a hung parliament would result in instability in the Eurozone’s third largest economy which is already burdened with high private debt and unemployment.
Among the lower tier data released today was Spain’s HICP, which measures inflation and consumption, similar to the readings Consumer Price Indices (CPI) provide. Spain’s reading dropped to year-on-year figure of 1.3% from a previous 1.8%, disappointing expectation it would only fall to 1.5%. Both Italy and Greece’s year-on-year Producer Price Indices rose, with Greece’s indicating inflation in commodities rising there more quickly than it is in Italy.
Other Currencies – Highlights
Sterling rose against the Australian Dollar, trading at 1.78 AUD. According to a release by the Reserve Bank of Australia (RBA), in November the country’s private sector credit grew by 5.4%, which was more than the expected figure of 5.3%. This is seen as indication that the RBA ‘s efforts to curb risky lending are having a positive effect.
The Pound is trading a little higher against the New Zealand Dollar, exchanging at 1.89 NZD. According to research by finance firm JBWere, foreign ownership of the New Zealand stock market rose in 2017. The firm’s Equity Ownership Survey found that offshore investors increased foreign ownership from 36.3% in 2016 to 37.9%, the highest levels since 2009.
Sterling has picked up more strength against the Canadian Dollar, exchanging at $1.69 CAD. The Canadian Dollar has been enjoying a rally against the US Dollar which has lost 1.9% in value to its Canadian contemporary since 18 December. The tables might be turned in January when the US Dollar will likely strengthen if the Federal Reserve raises interest rates, as is expected.