US Fed Finally Raises Rate
The pound has been pummelled by a one-two punch beginning with the news that the UK will trigger Article 50 at the end of the month. Secondly, Prime Minister (PM) Theresa May appeared poised to set the process in motion this week, but when she was caught out by Nicola Sturgeon’s bid for a second independence vote, the PM seemed unnerved. The spectre of Scotland leaving the UK, if the negotiations don’t secure access to the single market, will hang over Brexit negotiations for the next 2 years.
Janet Yellen is set to raise interest rates today and her statement will give the US dollar strength if she hints that the Federal Reserve is open to another 3 rate hikes this year. The other key event today is the Dutch election which is seen as a bell weather for the strength of populism across Europe.
Pound Sterling – UK Markets
The political skirmish between the UK government and Scotland’s National Party sent the pound to a 2-month low against the dollar yesterday. Sterling has strengthened today after polls show Scots would vote to remain in the UK and also that the PM can delay the Scottish vote. After Scotland’s parliament votes on the referendum next Tuesday, the PM is certain to block Scotland’s attempt to schedule the vote before Brexit negotiations conclude. Yesterday, Charlotte Hogg’s resignation from the Bank of England (BoE) was a blow to those hoping to see more women working on the male dominated monetary policy committee. The gender gap is widening since there have only been 7 women (vs 33 men) on the committee since it began 20 years ago, with Hogg being one of the 3 who departed the last 4 months. It was hoped that the deputy general would become the first female BoE governor when Mark Carney steps down in 2019. The BoE’s monetary policy meeting tomorrow is the biggest scheduled event on the UK calendar for the rest of the week. A confident statement by Mark Carney will be helpful to the weak pound.
Today’s just released UK employment reports are stronger than expected with January’s unemployment rate unexpectedly dropping to the lowest rate in over 40 years from November to January. The unemployment rate fell from 4.8% to 4.7% which is 31,000 fewer people seeking work. With 1.58 million unemployed, the employment rate is the highest on record at 74.6%. The Office of National Statistics reports that the number of self-employed people is rising faster than the number of employed people, a measure of the rise of the ‘gig economy’. Wage growth continues shrinking, as year-on-year wages increased by 2.3% vs January’s growth of 2.6%. This is below the anticipated 2.4% which, factored in with rising inflation, shows a measurable pinch in disposable income.
US Dollar – US Markets.
The US dollar has weakened ahead of the Federal Reserve’s monetary policy statement due late today. The central bank is almost certain to raise interest rates by 25% points as the world’s largest economy shows signs that it’s strong enough to benefit from a rate hike. The first of several planned hikes it will raise borrowing costs gradually with the first hike having very little effect. President Trump’s recently released healthcare plan has been shown to sacrifice the very people who voted for him expecting his protectionism: older, working class and low-income Americans. Termed ‘RyanCare’, House Speaker Paul Ryan’s bill allows insurers to charge older Americans up to 5 times more than younger ones. The Republican plan, which offers the wealthiest and businesses $600 billion in tax cuts over a decade, is unlikely to pass in its present form.
Inflation is rising as measured by yesterday’s US producer prices for February which rose by more than was expected. Forecasters are expecting a gain of 0.1%, not the 0.3% monthly rise. US wholesale costs increased quickly for the year to a 5-year high of 2.2% driven by increased global demand for commodities. Almost 70% of the rise in goods prices was caused by the 1.6% jump in the cost of electricity. The US stock market was subdued by a sharp fall in oil prices after OPEC shows Saudi Arabian oil production is rising.
Euro – European Markets
The euro is expected to fall tomorrow if far-right nationalist Geert Wilders emerges as the winner of the Netherlands’ elections today. He and Dutch Prime Minister Mark Rutte are neck and neck in the latest polls. Mr. Wilders’ People’s Party for Freedom and Democracy is expected to gain 22 of the 76 seats needed to form a coalition government. Mr. Rutte, who’ll likely win 24 seats, has ruled out forming a coalition with euro-sceptic Wilders. The Turkish foreign ministry rejected EU officials’ calls for restraint as Turkey banned the Dutch ambassador and suspended political discussions yesterday. In French political news, Francois Fillon has been placed under formal investigation for allegedly paying thousands of euros to his family for work they don’t appear to have done. Fillon, the frontrunner in France’s presidential election, has denied the charges but said he’d drop out of the presidential race if he was placed under investigation.
Germany, Europe’s biggest economy, has at 21%, one of the largest gender pay gaps in the Eurozone. In 2016 women earned on average €16.26 an hour compared to men who earned €20.71 on average. Germany’s statistics agency says the issue requires improving access to high-end jobs for women, noting that the gap was a much smaller 6% for those in similar professions with the same qualifications.
Other Currencies – Highlights
The euro began this week at a 3-month high against the Swiss franc after comments by European Central Bank President Mario Draghi hinted the bank could raise interest rates before quantitative easing measures are lifted. The franc has slid from a 2-week high against the US dollar as the dollar picks up strength ahead of the US Fed’s rate announcement today. Today’s Swiss producer and import prices show inflation rising 0.8% to 1.3% when compared to year-on-year to last February. This isn’t showing a clear picture of inflation because February’s prices—which had been expected to come in at 0.4%—dropped to -0.2%. And last week’s consumer prices rose at the fastest monthly rate in nearly 5 years, which indicated the first increase in inflation since 2010.
Tomorrow, the Swiss National Bank (SNB) makes its monetary policy plans known. It’s almost certain to leave rates unchanged at present and downplay any signs of inflation. The Swiss franc is the most overvalued currency in the world, in spite of the SNB’s extensive efforts to keep it weak. Rising inflation makes it more complicated for the SNB to keep devaluing the currency which is necessary to support Switzerland’s export-reliant economy. This year the bank has had to increase efforts to keep the safe-haven franc weak as investors turned to the franc in reaction to the weakened pound and euro.