Euro Weekly 6 July 2018
The pound finished last week relatively strong, thanks to stronger than expected economic data. The second revision to first quarter gross domestic product in Britain put growth at 0.2% instead of the 0.1% reported previously. The current account data also showed a narrowing of the deficit as goods exports rose to a record high. There was a hat trick of positive PMIs for the UK this week. The Purchasing Managers’ Index (PMI) for Britain’s manufacturing sector came in above forecast – and a tick higher on the month. The construction sector PMI came in at 53.1 – higher on the month and half a point ahead of forecast. The services PMI, which reflects four fifths of the UK economy, was 55.1 for June, beating the forecast by more than a point. Better PMIs mean a stronger economy and a greater chance of the Bank of England taking interest rates higher in August. That is the logic that has emerged this week. Three of the nine Monetary Policy Committee members voted for a rate increase last month: it only needs another two to join them at the next meeting. The pound rose on the prospect, but faces more uncertainty today as the prime minister presents ministers with her latest post-Brexit customs plan. The Downing Street spin is that the plan is “a significant step forward” that will offer “the best of both worlds”. Investors increasingly believe that the no-deal scenario is off the table and that Britain will retain a close relationship with Europe after it leaves the EU.
In the early hours of Friday morning the euro jumped higher on news that the European Council had reached an outline agreement on the management of migration. The accord was seen as putting an end to arguments in Germany and Italy that had threatened the sweet harmony in intra-EU cooperation. Over the weekend it transpired that an agreement had not been reached. Chancellor Angela Merkel managed to smooth over the divisions within her party and reach a compromise. Aside from the political manoeuvring, euroland ecostats were few. Retail sales were flat in May, falling just short of analysts’ predictions, and producer prices rose by a monthly 0.8%, twice as much as expected.
US factory orders rose by an above-forecast 0.4% but the main focus has been on the end of the week and the potential realisation of the predicted trade war. Investors believe that the US president will not march his country over the trade war cliff. Higher prices for steel, aluminium and oil are having an effect on US companies and the proposed punitive tax on European cars would hurt consumers. US farmers, metal-bashers, oil producers and car manufacturers are already facing Brexit-like uncertainty about the effects of tariffs and other regulatory changes. An escalation today would heighten those concerns. That might bring short-term benefits for the dollar. In the longer run though, the economic damage, coupled with America’s rising trade and budget deficits, would hardly be positive.
Canada’s GDP data put growth in April at a monthly 0.1%, infinitely more than the 0.0% that analysts had predicted. The Loonie also continued to feel the benefit of firmer oil prices: at close of play on Friday last week WTI crude was up by 8.2% from Monday’s opening level. Canada’s manufacturing PMI came in ahead of expectations at 57.1 but it had no lasting effect on the Loonie.
Australia recorded an above-forecast services sector PMI, a 0.4% monthly increase in retail sales and a narrower trade surplus. On balance they were positive for the Aussie, which strengthened by a net 0.3% on the news.
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