UK Inflation to Fall in Late 2018
The Pound has held on to the modest gains that were made on Friday, ahead of the holiday break. There is little economic data due for release this week that would be likely to cause exchange market fluctuations. A report released by Resolution Foundation predicts that UK inflation will continue to outstrip pay growth until late 2018. Inflation rose to a near six-year high of 3.1% in November, due to the weaker value of the Pound and it is expected to fall late in the coming year, as the market adjusts to the impact of the weaker currency.
The US Dollar has lost ground against its major counterparts in Asian trading. The Dollar fell slightly against the Pound and dropped to a three-week low against the Euro. Yesterday’s data releases show the US economy continues performing well. Home prices are steadily rising, while Texas manufacturing output spiked to an 11-year high in December.
Pound Sterling – UK Markets
The Pound is holding on to recent gains against the US Dollar, with the exchange rate remaining at $1.33. Sterling fell slightly against the Euro, with the exchange rate set at €1.12.
Resolution Foundation, a leading independent British think tank, reports that 2018 looks set to be a standstill year on pay rises and the economy. They predict that the current pay squeeze may well get deeper before it eases as inflation recedes later in 2018. They project that the first noticeable year on year rise in real pay won’t be seen until December 2018. However, the lowest paid workers will see a 4.4% increase in April when the National Living Wage increases to £7.83 per hour.
Today, a report by Bloomberg illustrates the concerns that the UK pharmaceutical sector face that prompt them to call for a Brexit deal that protects their industry which had a turnover of £29 billion in 2015. The 664 British firms, who employ over 62,000 workers, would like a deal that is as close to the one presently in place as is possible. After Brexit, the European Medicines Agency will move from London to Amsterdam, decreasing London’s position as a leader in the development of pharmaceuticals. Also, after the Horizon 2020 programme expires, the UK will lose EU research funds which amounted to almost 9 billion Euros from 2007 through 2013.
US Dollar – US Markets
The US Dollar fell against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY) fell to a figure of 93.09. Later today, the US Consumer Confidence index for December will be out and tomorrow Initial Jobless Claims are scheduled for release.
The pair of economic data points that came out yesterday in the US were both positive indicators of economic growth. The S&P/Case-Shiller National Home Price Indices for October showed strong year-on-year growth of 6.4%, which was higher than the 6.3% rate anticipated and also better than the previous reading of 6.2%. The best growth was in Seattle, Las Vegas and San Diego where home prices increased by 8.1 to 12.7%. The low interest rates that are currently driving home sales could be increased in the coming year when the Federal Reserve is expected to raise rates several times.
The Dallas Federal Manufacturing Business Index for December sailed past expectations. A modestly improved figure of 20.0 was projected after a previous reading of 19.4, so the release of the 29.7 reading made for a pleasant surprise. The survey of Texas firms shows robust growth in December as new orders spiked to an 11-year high. Perceptions of broader business conditions rose by double digits to highs not seen since 2006.
Euro – European Markets
The Euro has held steady against the US Dollar with the exchange rate set at $1.18. The Euro fell last week, following news of the Catalan election, but it continues to strengthen supported by last week’s strong economic data.
The Euro’s sudden, unexpected “flash crash” on Christmas Day was caused by a computer algorithm and not based on any nervousness regarding the political outcome of the Catalonian election. On December 21, pro-independence parties retained an overall majority in the Parliament, although the unionist Ciudadanos won the majority of seats. Moody’s noted the results will negatively impact Spain’s economic growth, saying that the approach to the independence procedures will “further weaken the already weak finances of the region.”
The European markets are quiet today, with very little data being released after being closed for the holiday yesterday. The European Central Bank (ECB) has trimmed its quantitative easing programme, cutting its bond purchasing programme in half, from €60 billion down to €30 billion, starting in January. Since the stimulus programme will be extended until at least September “or longer if needed,” until inflation rises “below, but close to 2%.” Eurostat figures show annual inflation was 1.5% in November, rising from 1.4% in October, which makes it unlikely that the ECB will raise interest rates in 2018.
Other Currencies – Highlights
Sterling lost a little ground against the Australian Dollar, trading at 1.72 AUD, due to a rally in commodity prices that lifted the Australian Dollar to its highest level in two months. Sydney’s booming housing market has been slowed since the Australian Prudential Regulation Authority told lenders to cut back on risky interest only mortgages that are favoured by investors. The decrease in investor participation brought annual price increases down to 3.3% this year, from a 15.9% increase reported by CoreLogic for 2016.
The Pound slipped a little against the New Zealand Dollar, trading at 1.89 NZD. On Friday, the coalition government announced a 4.5% increase to the minimum wage, bringing it up to $16.50 per hour. The pay rise affects an estimated 164,000 workers representing about 7% of New Zealand’s workforce.
Sterling picked up a little strength against the Swiss Franc, trading at 1.32 CHF. The Swiss Franc exchange rate was not affected by the release of November’s Swiss UBS Consumption Indicator which came in at 1.67, slightly lower than the 1.68 figure expected. The ZEW Survey Expectations for December came in at 52, higher than the previous reading of 40.7.