UK Economic Growth Revised Lower
The Pound is trading lower today, primarily due to the US Dollar surging on expectation of a pending US interest rate hike. The UK’s Gross Domestic Product (GDP) shows that the economy grew by 0.4% in the last quarter of 2017, which is less than the preliminary estimate of 0.5%. Annual GDP of 1.7% was also revised lower from 1.8%, marking the slowest growth since 2012. The Office for National Statistics (ONS) also reported that the trade deficit widened in the fourth quarter, suggesting the economy remains unbalanced as business investment also stalled.
The US Dollar spiked after yesterday’s Federal Open Market Committee (FOMC) Minutes suggested that the Federal Reserve intends to raise interest rates in March. Expectation that rates may rise as many as four time in the year have sent global markets lower as investors react to the unexpected news. The Euro is trading higher ahead of today’s European Central Bank’s Monetary Policy Meeting release.
Pound Sterling – UK Markets
The Pound has weakened further against the US Dollar, with the exchange rate at $1.38. Sterling is also lower against the Euro, exchanging at €1.13.
Today’s release by the Office for National Statistics has been broadly disappointing, leading analysts to suggest that the UK is not ready for an interest rate hike in the near future. Total Business Investment fell to 0, for the fourth quarter, missing the expectation it would rise by 0.5%. The UK’s 1.4% year-on-year GDP growth for the last quarter of 2017 is the slowest of any G7 country, lagging behind Germany’s robust expansion of 2.9%.
Brexit uncertainty has been the cause of the UK moving from “the top of the pack to the bottom” compared to other G7 economies, according to Bank of England governor Mark Carney. Brexit uncertainty has already reduced British wage growth by 3.5%, and Carney said it will fall further to a loss of 5% by the end of the year. He also said the decline in the Pound’s value made workers poorer since it caused inflation to outpace wage growth.
Today, the Brexit sub-committee meets with the government at Chequers to come to an agreement on the UK’s approach to Brexit. Prime minister Theresa May has asked the EU to extend the Brexit transition period past the 31 December, 2020 date that the EU has stipulated. Britain is also expected to concede that EU nationals who immigrate to the UK during transition will have the same rights as those who arrived earlier. These decisions will likely be opposed by the over 60 Conservative lawmakers who demand a quick, clean break from the EU in a push for a “hard Brexit.”
Yesterday’s unemployment data released by the Office for National Statistics shows that far more women than men found themselves unemployed in the quarter from October to December, last year. The number of unemployed women rose by 35,000 to 689,000, while the number of men rose by 11,000 to 782,000. The Young Women’s Trust noted that 21,000 more young women are unemployed due to employer discrimination, low pay and unaffordable childcare.
US Dollar – US Markets
The Euro has steadied after losing ground to the US Dollar, exchanging at $1.22. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is at 90.02.
The US Dollar was supported by January’s Federal Open Market Committee (FOMC) Minutes. New Federal Reserve (Fed) chairman Randal Quarles, who was nominated to the bank’s board by president Donald Trump, said that Trump’s recent tax cuts and fiscal policies could help sustain the economy’s strong momentum. Quarles also said that he thinks a gradual rise in interest rates are now “appropriate.” It is widely expected that the Fed will vote to raise interest rates at their next meeting on 20-21 March. FOMC member Patrick Harker said he expects two rate hikes this year, but the markets are pricing in the likelihood of four hikes.
Yesterday’s IHS Markit Purchasing Managers Induces show stronger than expected growth in the services sector which surged to 55.9 in February, up from January’s reading of 53.3. The Manufacturing PMI was expected to slow to 55.4 from 55.5, but it also hit the 55.9 figure, as did the composite.
Existing Home Sales of 5.38million for January fell far short of expectation of rising to 5.60million from 5.57 sales in December. The release yesterday by the National Association of Realtors noted that the unexpected 4.8% annual decline in what accounts for 90% of the US housing market was caused by a persistent shortage of houses that is pushing up prices.
Later today, employment will be featured in the Initial and Continuing Jobless claims. Initial Jobless Claims are forecast to remain steady at 230,000. Continuing Jobless Claims for the first week of February are expected to ease from 1.942million down to 1.939million.
Euro – European Markets
The Euro has advanced against the Pound, with the exchange rate set at £0.88.
Germany’s IFO-Current Assessment for February slipped by more than the expected reading of 127.0 down to 126.3, showing current conditions and business expectations have eroded since January when the reading was 127.7.IFO Current Assessment and Expectations readings were also lower, to 115.4 and 105.4, respectively. This is further confirmation that the Eurozone’s private sector growth has slowed since January, when it had the strongest expansion seen in 12 years.
France’s Business Climate slipped by more than the expected decrease of 113, down to 112, for February, after hitting 114 in January. Annual inflation is steadily rising, according to the Consumer Price Index (CPI) that was also released today by INSEE. February’s year-on-year CPI held steady, as expected at 1.5%, although January’s month-on-month CPI was -0.1%.
Later today, the European Central Bank’s (ECB) January monetary policy meeting minutes will be released. It is likely the ECB will be very cautious towards discussing any plans to alter their Quantitative Easing programme, or make any other statement that might lift the Euro. After the minutes of their December meeting lifted the value of the Euro, there will likely have been discussions about keeping the currency from appreciating too rapidly.
Other Currencies – Highlights
Sterling slid against the Australian Dollar, with the exchange rate at 1.77 AUD. A report by the International Monetary Fund (IMF) has warned that wage growth In Australia is “weak” and inflation is “below its target range.” IMF also warned that high household debt has become an important economic vulnerability.
The Pound is trading weaker against the New Zealand Dollar, exchanging lower at 1.89 NZD. The new Comprehensive and Progressive Trans-Pacific Partnership will add between $1.2billion and $4billion NZD to New Zealand’s economy once it is fully implemented, according to a government commissioned report.
Sterling is trading lower against the South African Rand, exchanging at 16.24 ZAR. The Rand slipped from its recent highs yesterday as investors braced for the impact of the new budget which plans to narrow the country’s gap in finances by increasing VAT for the first time in 25 years to 15%.