The weakened Pound is likely to rebound on expectation that the Bank of England (BoE) will indicate their intention to raise interest rates in May. Tomorrow, the BoE’s monetary policy committee decision and inflation report will be closely watched for signals that would lift Sterling. A leading economic forecaster has upgraded their expectations for Britain’s economic growth, saying that the BoE will raise rates in May and November. Today, prime minister Theresa May and her senior ministers begin two days of critical meetings, to decide the UK’s future relationship with EU. The cabinet will also focus on trade, Northern Ireland and immigration.
The Euro is supported by strong economic data and an end to the four-month political crisis in Germany. A deal has finally been reached in coalition talks between German Chancellor Angela Merkel’s Christian Democrats (CDU) and the Social Democrats (SPD) after overnight talks. Global stock markets have returned to less volatile levels that were triggered in the US by a dramatic fall on Wall Street, although investors remain cautious as the recovery slowly gains pace.
Pound Sterling – UK Markets
The Pound remains weaker to the US Dollar, with the exchange rate at $1.39. Sterling is rising slowly against the Euro, exchanging at €1.12.
Tomorrow’s Bank of England meeting, known as super-Thursday, might lift the value of the Pound, if the central bank suggests they are considering raising interest rates. There is an expectation of an interest rate increase of 0.25% in the first half of this year, followed by another increase six months later. Analyst at RBS Bank believe that interest rates could be raised in May, after BoE has confirmation that a Brexit transition period has been agreed.
A leading economic forecaster, the National Institute of Economic and Social Research (NIESR), has upgraded their predictions for the UK’s economy. The NIESR says that the UK will rebound from the slowdown in 2017, thanks to strong global growth and UK exporters benefitting from the weak Pound. The institute has revised growth from 1.7% up to 1.9% for this year and 2019. The NIESR also expects the Bank of England to raise interest rates in May and November. This is more upbeat than the Office for Budget Responsibility’s expectation that growth will fall from 1.8% in 2017 to 1.4% this year and drop to 1.3% in 2019.
Before stock market volatility calmed down yesterday, shares in London had their biggest one-day fall since the Brexit referendum. The FTSE 100 had around £50bn in value wiped off as it dropped 2.6%. Sonja Laud, head of equity at Fidelity Investments, said that the markets are adjusting to what is seen as a more normal long-term condition of volatility after “being lulled into a false sense of security.”
UK house prices fell by 0.6% in January, according to a survey released today by Halifax bank. Annual house price inflation has now fallen to 2.2%, down from 2.7% in December. Halifax also notes that fewer new homes are coming onto the market, having fallen for 23 consecutive months. Halifax’s monthly growth rate matches the 0.6% reported by Nationwide, although the later indicate annual growth is higher, at 3.7%.
US Dollar – US Markets
The US Dollar has picked up strength against the Euro, exchanging at €0.80. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is up, at 89.76.
Economists have noted that the fall in global stock markets which originated on Wall Street, is a return to normal market conditions, since the markets typically drop by around 10% every year. The recent surge in stock values were driven by three factors that are poised to change: faster global growth, low inflation and loose central bank policies. The 2017 global growth rate of 3% will be hard to sustain, especially if the unemployment rates slips lower and wage growth drives up inflation. Another concern is the US government is facing trillion-dollar deficits under the new tax cuts, which may face the Federal reserve to keep raising interest rates.
Yesterday, the US Trade Balance for December showed the trade deficit rose to $53.1bn, for the month and $566bn for 2017. This is the highest deficit since 2008’s figure of $708.7bn, despite president Trump’s promise to balance the US’s trade relationships. During his first year in office, the US trade deficit has grown by 12.1%. Imports were a record-high $2.9trillion, far surpassing exports of $2.3trillion. The goods deficit with China rose to a record $375.2bin and the gap with Mexico climbed to $71.1bn in 2017. The imports surge reflects economic strength as consumers purchase more foreign products.
Euro – European Markets
The Euro has slipped against the US Dollar, with the exchange rate set lower at $1.23.
A deal has finally been reached in coalition talks between Angela Merkel’s Christian Democrats (CDU) and the Social Democrats (SPD) after overnight talks. Prior to the meeting yesterday morning, Merkel said that “Each of us will still have to make painful compromises.” SDP leader Martin Schultz said his goal is: “building stable, lasting government in one of the largest industrialised countries in the world.” A deal on distributing ministries was the final aspect of clinching the coalition deal which must still be approved by SPD voters. It appears Angela Merkel will likely remain the German Chancellor, and the finance and foreign ministers would be SPD members.
Brexit will be discussed today at the European Central Bank’s (ECB) non-monetary policy meeting in Frankfurt. EU chief negotiator Michel Barnier will attend the meeting to discuss Brexit details including Article 50 matters.
German industrial production declined by slightly less than expected in December, according to today’s release by Statistisches Bundesamt Deutschland. The sector is clearly rallying since yesterday’s release of German factory orders showed they had rebounded to 3.8% growth in December, after slipping by 0.1% in November. Annually, industrial production increased by 6.5%, while December’s month-on-month production fell by 0.6%.
Stock market turmoil delayed Greece’s plan to issue a new government bond yesterday, which Athens hopes will raise €3bn. The seven-year bond is now “expected to be launched and priced in the near future subject to market conditions.” Greece had planned to issue their bond last month, but was delayed by final reforms EU required for Greece’s third bailout. The country hopes to exit its third bailout programme this summer, as talks on further debt relief with EU’s economic affairs commissioner begin today.
Other Currencies – Highlights
Sterling has risen a little against the Australian Dollar, today, with the exchange rate at 1.77 AUD. Australia’s Trade Balance slipped to a $1.36bn trade deficit in December, missing the forecast of a surplus of $200m. A surge valuing $1.9bn in imports of fuels and machinery was unable to counter the $510million increase in exports.
The Pound has risen slightly against the New Zealand Dollar, today, after falling yesterday, exchanging at 1.90 NZD. New Zealand’s stock market was spared much of the global market downturn because its markets were closed for the Waitangi holiday. New Zealand finance minister Grant Robertson said he was “confident in the strength and stability” of the country’s economy.
The Pound has fallen by 70% against the Japanese Yen, trading at 151.91¥. Bank of Japan governor Haruhiko Kuroda sought to dispel concerns that the global equities rout could damage Japan’s economic recovery, since it strengthened the currency and a weaker Yen is critical to Japan’s export sector. Japanese ministers are visiting the US to address trade tensions this week.