Will May Trigger Article 50 this Week?
Sterling wasn’t well served by a series of weaker than expected releases on Friday that indicate the slowing economy won’t probably meet last year’s 1.8% rate of expansion. And, as if concerns about a possible recession aren’t putting enough pressure on the pound, today the Brexit bill returns to parliament. Rumours abound that UK Prime Minister (PM) Theresa May will trigger Article 50 as early as tomorrow.
The US dollar dropped as the euro strengthened when Friday’s Non-Farm Payroll figures showed that yearly wages rose by only 2.8%. But since the US added more jobs than expected, there’s still expectation the US Federal Reserve will raise interest rates for the first time in a decade this Wednesday.
Pound Sterling – UK Markets
The pound fell to an 8-week low against the euro on Friday, after the European Central Bank opened the possibility of an interest rate hike before the conclusion of its quantitative easing programme. Today, Sterling’s still weak as the Brexit bill returns to the House of Commons where it’s expected that the amendments added in the House of Lords last week will be removed. If the bill is ready, PM May is likely to trigger Article 50 on Tuesday, before the Dutch elections on Wednesday. Otherwise she’ll time it so it doesn’t coincide with 25 March, the 60th Anniversary of the European Union, in Rome. Last week PM May’s government made an effective policy ‘U-turn’ by delaying Philip Hammond’s highly controversial National Insurance rise for self-employed persons until the autumn Budget. Clearly, MPs would have voted it down when the autumn budget was legislated, so, going forward, the Chancellor will find another revenue source for funding NHS and the proposal will be quietly rubbished.
There’s scarcely any data out this week until Wednesday’s release of unemployment and earnings figures. There’s no chance for any announcement of an interest rate hike on Thursday at the Bank of England’s monetary policy meeting. Any comments made by governor Mark Carney are likely to be intended to soothe a nervous marketplace, especially if Article 50 has been triggered on Tuesday. It’s speculated that the pound will fall sharply when Article 50 is triggered since it introduces unprecedented Brexit uncertainty. A recent HSBC survey of 2,000 Britons found they don’t expect Brexit to harm the UK economy but were worried about rising inflation because they’ve already felt the pinch of less spending money.
US Dollar – US Markets.
The dollar was at a 7-week high against the Japanese yen ahead of Friday’s much anticipated Non-Farm Payrolls. The report, showing the total number of new jobs created, gives policymakers important insight into the state of the economy. Friday’s figure of 235,000 new jobs smashed expectations of adding 190,000. In time for the proposed infrastructure projects, 58,000 jobs were added to the construction sector. This brought US unemployment in February down to 4.7% from January’s 4.8%. This was a mixed report since it showed annual wage growth rising slowly from 2.6% in January to 2.8% in February, bringing the average hourly pay up to $26.09. There’s now a strong expectation that the Federal Reserve might raise interest rates as many as 4 times this year, if the economy continues adding jobs.
The American Society of Civil Engineers (ASCE) report has given US infrastructure a nearly failing grade of D+, which is unchanged from the previous reading. In a report published every 4 years, ASCE defines the poor rating as infrastructure that is ‘in poor condition and mostly below standard, with many elements approaching the end of their service life.’ There’s a funding gap of over $2 trillion between the funding currently projected and the $4.59 trillion it will take to make the improvements that would raise the grade to a B by 2025, ASCE reported.
Euro – European Markets
The euro hangs in limbo this week, as Holland rows with Turkey ahead of the Dutch elections on Wednesday. At last week’s European Central Bank (ECB) meeting, President Mario Draghi’s comments gave the markets confidence in the single market currency. His comments suggesting that the ECB could raise interest rates at the end of this year have strengthened the euro and his speech today will be watched very closely for hints of a willingness to increase borrowing costs in the near future. On Friday at the EU summit, 27 members met without the UK’s PM May, to plan their upcoming 60th anniversary celebration in Rome. From now on until that next meeting on 25 March, they will be working on statements encouraging deeper unity, in an effort to hold the bloc together after the blow of Brexit.
Last week’s data demonstrates the challenges the Eurozone faces as a stronger than expected German trade balance shows how that richest member state benefits from trading in the bloc. Germany has recently pressed the ECB to consider raising interest rates, because their economy is strong enough that a rate hike would only increase growth. German figures demonstrate that the weak euro is keeping the European powerhouse’s export sector strong. January’s imported goods and services leapt up by 3.0%, above a forecast of 0.5% and December’s 0.1%. Exports were way up from December’s slump of -2.8% to 2.7%, surpassing the expected rise to 1.85%. The rise in exports more than made up for the increased imports, giving Germany a better than expected trade balance of €18.5bn.
Other Currencies – Highlights
India’s rupee rose after Prime Minister Narendra Modi’s party won by a landslide in the country’s largest state. The rupee had already risen to a 17-week high against the US dollar when exit polls showed Modi’s Bharatiya Janata Party (BJP) was likely to win the crucial region of Uttar Pradesh. Modi’s victory in Uttar Pradesh is an endorsement of his economic reform, despite the severe economic disruption his surprise announcement caused for almost every person in the county and abroad. The rupee rose by 0.5% against the US dollar on the election which increases Modi’s odds of re-election in 2019.
Today’s the Reserve Bank of India (RBI)’s scheduled conclusion to all restrictions on cash withdrawals from bank saving accounts. This was just one aspect of the Prime Minister’s economic reform policy that stunned India on 8 November when Modi announced his decision to demonetise the 500 and 1,000 rupee notes. The largest notes in circulation in the cash-reliant economy were blamed by the Prime Minister for a large black market and a corrupt economy. RBI estimated there were 16.5bn 500 rupee notes and 6.7bn 1,000 rupee notes in circulation and after they had been hastily returned to the banks, the largest bill in circulation was the 100 rupee note, with a value of around $1.50. The Prime Minister’s party’s win shows he’s successfully pulled off the extremely chaotic demonetisation, convincing voters that the economic challenges he put them through in November will brighten India’s future.