Sterling is unable to mount a real recovery without assurance that the government can protect the economy from a hard Brexit. The impact of losing access to the single market is multiplied due to the rising chance of Scotland voting on independence during the Brexit negotiations.

Ahead of US President Trump’s address to Congress, he emphasised that his plan for a ‘revved up economy’ focuses on him negotiating better deals as he increases the US military budget by 10%. His upbeat speech disappointed those hoping for detailed plans, and he grossly exaggerated unemployment rates, quoting a figure of 94 million when January’s records show it was closer to 7.5 million. He also promised a ‘massive tax relief for the middle class’, although his programs substantially favour the top 1% wealthiest Americans.

Pound Sterling – UK Markets

Sterling has made positive gains against the euro although it continues a course of weakness against the US dollar. This morning’s Nationwide Housing Prices release was a pleasant surprise, showing February housing prices rebounded to 0.6% from January’s figure of 0.2% which had been the weakest in a year. This defies economic predictions of Brexit causing a fall in prices, which is still being forecast despite there being a shortage of available housing and low borrowing costs. UK factory growth is still at a 2 ½ year high, but it’s losing some momentum according to today’s Markit/CIPS PMI manufacturing report.

The pound, like Prime Minister Theresa May, is under pressure due to the increasing complexities of Brexit. Political schisms from within the UK, in particular from Scotland’s First Minister Nicola Sturgeon, threaten to split the UK. If Scotland times a second Independence referendum to coincide with Article 50 being triggered, it will throw more uncertainty into the marketplace. The government now faces a likely defeat in the House of Lords over the thorny issue of securing the rights of EU citizens in the UK which will delay the Brexit bill being passed by at least a week. These days, politics, rather than substantive data reports, have the upper hand regarding the pound and euro.

US Dollar – US Markets

Trump’s optimistic address to Congress managed to convince European investors to chance a bet on his vague stimulus plans. His increased presidential demeanour didn’t do the US dollar any damage, but the greenback is being energised by the rising expectation of an interest rate hike. Yesterday, the market seemed to have priced in the fifty percent odds that Federal Reserve Chair Janet Yellen might indicate a decision to raise the rate in her Chicago address this Friday.

Yesterday, the US dollar was brought down by lower than expected GDP data showing that US growth slowed down in the last 3 months of 2016. Its weakest performance for the whole year since 2011 was blamed on increasing imports, a fall in exports and less government spending. Trump said yesterday that he wants to rev up GDP by several points, however it remains to be seen whether or not lawmakers will permit a massive increase in the national debt. There’s little detail suggesting where President Trump hopes to find the $1trillion he promises to spend on infrastructure, which is in need of $1.4 trillion in repair over the next decade, according to a 2013 report by the American Society of Civil Engineers.

Euro – European Markets

The euro might be weighed down by French politics, but France’s economy seems to be shrugging prosaically, saying c’est la vie. Yesterday, France’s GDP figures show that the economy grew by 1.1% in 2016, and both business and consumer confidence are booming. This is tempered by today’s Markit PMI which shows French factory activity slowed for the second month in a row. Higher prices, in response to rising commodity costs are driving up inflation. In yesterday’s Sentix research survey, investors gave their strongest predictions ever that France will leave the EU. They said the recent challenge in accurately predicting elections, like the US Presidency and Brexit, make them more pessimistic in their predictions.

The already strong Swiss franc wasn’t lifted further by today’s Manufacturing PMI release which came in at an impressive 57.8. February’s better than anticipated economic growth is inspiring optimism for the year ahead. This is making the franc so strong that the currency is now a ‘challenge’ for Swiss companies. Meanwhile, a weak euro is enabling stronger manufacturing growth, benefitting certain member states, like Germany, in particular, but not France or Spain. Germany’s annual employment figures were at a record high and the Markit Manufacturing PMI shows February factory growth nearing a 6-year high. The best performing EU economy last year, Germany’s 4th quarter growth was 0.4%. Germany’s manufacturing accounts for about a fifth of GDP, so this year’s first quarter of growth is expected to rise to at least 0.6%.

Other Currencies – Highlights

Japan’s yen whipsawed this week on the release of dismal industrial production figures showing a decline of 0.8%, far from the expected increase of 0.4%. This first decline in 6 months caused a slight panic that was dispelled when retails sales unexpectedly improved to 1.0%, over the anticipated figure of 0.9%. This isn’t a trend investors will hope to see continue long-term, but the increase in spending signals a steadily increasing consumer appetite, with three months of gains, after a long period of contraction. The weaker than expected industrial output, however, indicates the fragile state of the world’s third largest economy.

Japanese Prime Minister Shinzo Abe, an avid fan of Donald Trump’s book, The Art of the Deal, must bet that his alliance with the US president will help Japan’s economy recover. Sales of Asian exports, especially cars, began making a modest recovery last year, and can hardly afford any protectionist policy Trump might introduce to tighten US trade balance which rose by more than expected. Yesterday’s US data release showed that the January balance of goods came in a $69.2bn, higher than the estimated $66bn and the December figure of $64.4bn. This is bad news for Japanese exports since it increases the chance that they’ll be taxed if Trump keeps his promise to put America first. The yen fell against the dollar after President Trump’s speech.