Euro Weekly 20 April 2018
Last week the pound clocked an average gain of 1.0%. The trend continued at the beginning of this week; sterling strengthened by an average of 0.4% against the other ten most actively-traded currencies. From its levels at the end of March the pound has risen by an average of 2.0%, adding approximately three US and two euro cents. For the year to date those numbers are 4.4%, eight cents and three and a third cents. However, economic statistics are causing some uncertainty. Pay was up by an average of 2.8%, lower than the expected 3%, both with and without bonuses. Unemployment fell to 4.2%, its lowest level since 1975. The pound fell by an average of 0.2% at the news and there was more bad news on Wednesday when the headline inflation figure came in at 2.5%, appreciably below the 2.7% that investors had been teed up for. The CPI itself was up by an annual 2.5% and the old retail price index rose 3.3% instead of the forecast 3.6%. Core prices, which exclude food and fuel, were 2.3% higher on the year. Unusually cold and snowy weather caused retail sales volumes to drop by 1.2 percent compared with the month before. Looking at the quarter as whole, sales dropped by 0.5 percent compared with the final three months of 2017 – the biggest fall since Q1 2017. Sterling fell to a one-week low after the data, which caps a week where wages rose more slowly and inflation dropped quicker than expected, raising doubts about how far the Bank of England will raise interest rates this year. Bank of England Governor Mark Carney’s comments about “mixed data” in an interview and his wish to avoid fixed dates for future changes suggest that the Monetary Policy Committee may have to readdress the idea of the expected rate increase next month. After a flying start, this hurt the pound.
There was little data from euroland; inflation readings from Spain (1.2%) and Germany (1.6%) and a slight widening of the Euroland trade surplus to €21bn in February were the key points. Investors appear to be looking to next week, when the headline rate of inflation is expected to come in at 1.4% and the European Central Bank will meet to discuss the removal of policy stimulus.
US retail sales beat forecast with a 0.6% monthly increase while the New York Fed’s manufacturing index undershot by three points at 15.8. The NAHB housing market index, which tracks building activity and intentions, was just about on target at 69. The dollar put in a below-average performance, losing four fifths of a cent to sterling and half a cent to the euro. It has fallen by an average of 7% in the last year. In the light of Trump’s comment yesterday that “Russia and China are playing the Currency Devaluation game”, investors suspect the Administration would be happy to see more of the same in the next 12 months.
On Monday the US president accused China and Russia of “playing the currency devaluation game”; on Tuesday Treasury Secretary Steve Mnuchin told investors to disregard the comment. Mr Mnuchin also helped muddy the waters regarding the possibility of the United States rejoining the Transpacific Partnership.
The Bank of Canada released its monetary policy statement this week but there was absolutely nothing remarkable in the document and that, from their reaction, seems to have disappointed investors. The market had apparently been expecting a more hawkish tone from the BoC, which is still thought likely to take interest rates higher in the next few months. The expectation means that there will be considerable focus on the upcoming Canadian retail sales and inflation figures, which have the potential to do more damage to the Canadian dollar.
The Reserve Bank of Australia held its cash rate target at 1.5 per cent at its April meeting. The bank last cut rates in August 2016.
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