Euro Weekly 23 March 2018
The pound had a good week. Warnings about the possible hacking of Britain’s infrastructure by the Kremlin were ineffective at holding back the pound at the end of last week and there was a raft of positive stats and announcements to provide support. Britain and the European Union have come to an agreement about a 21-month Brexit transition period. It isn’t the finished article and it contains a couple of big gaps, not least regarding Ireland, but investors signed up for it and they marked sterling higher on Monday. The good news is that a transition agreement has been reached, giving people and companies certainty about their situation until 31 December 2020. The less good news is that they still cannot be sure what will happen after that. Nevertheless, two and a half years of certainty is better than 12 months’ so the pound went up on Monday, strengthening by an average of 0.6%.
Rightmove’s index of UK house prices is up by 2.1% on the year. The UK consumer price index data showed inflation slowing from 3.0% to 2.7%, more of a deceleration than the 2.8% forecast by analysts. Traditionally, such a miss would have sent the pound lower: on this occasion it just wobbled a bit. The stats following limited the damage as there was total earnings growth, from 2.7% to 2.8%, showing that incomes are rising faster than prices. Towards the end of the week, the minutes of the Monetary Policy Committee were released, confirming that the interest rates will remain at 0.5%. The committee voted 7-2 to keep the rates the same, but provided some hawkish signals which could lead to change after the next meeting in May. The evolving tone is in response to recent data regarding the rate of inflation and employment, and a proposed deal to increase NHS pay by at least 6.5% over three years, which could have a knock on effect on public sector pay. The retail sales report for February gave mixed signals – sales volumes grew by 0.8% compared with January, but there was a drop of 0.3% in non-food items, suggesting consumers are spending on essential items such as petrol and groceries and that household budgets remain somewhat constricted. The move had been largely expected by economists; the pound gained slightly against the euro and the US dollar ahead of the decision; it dipped slightly as the news approached but appears to be retaining most of the gains so far today and has reached its highest level against the euro since June 2017.
In contrast, there was very little news from Euroland. Brexit negotiations impact the sterling much more than the euro and with so much drama elsewhere, the narrowing of the Euroland trade surplus from €23bn to €22bn in January made little impact either way.
In the US, the dollar dropped half a cent after the chairman of the Federal Reserve Jay Powell announced a rise in the benchmark rate by a quarter of a percentage point to target a range of 1.5% – 1,75%. The dollar dropped by half a cent as a response. The move was expected, and the “dot plot” chart of members’ predictions for the future course of interest rates was a tad more hawkish than the last time it appeared in December. Another two rate increases are on the cards for 2018 but there might just be three before Christmas.
The Canadian dollar started the week riding high, following reports the US has dropped a demand in the NAFTA talks that all vehicles made in Canada (and Mexico) for export to the US contain at least 50% US content. However, the optimism was short-lived. U.S. stocks slumped as President Donald Trump’s move to impose tariffs on up to US$60 billion of Chinese imports. Canada’s commodity-linked economy could be hurt if global trade slows and fell back after a 10 day high at the middle of the week.
The Reserve Bank of Australia released the minutes of its monetary policy board and unlike elsewhere, there was no change or any indication that change might be forthcoming. Nevertheless, the Aussie remained steady against the Canadian and NZ dollars, down by a cent against sterling. There were few other stats to make any impact, other than a report showing Australian house prices were 5% higher on the year.
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