Euro Weekly 20 July 2018
After the drama of US President Trump’s visit, including an attack on Theresa May’s Brexit plan, sterling had a tricky week. The prime minister amended a parliamentary bill to appease ultra-Brexiteers and still managed only a three-vote majority in the Commons. This compromise made investors uneasy once again. Bank of England governor Mark Carney’s testimony to parliament’s Treasury Committee was less heart-warming. Britain would face “big economic consequences” if it leaves the EU without a trade deal. He said a no-deal Brexit would hurt the EU at least as much as the UK but that was of scant consolation to sterling. A Bloomberg survey draws attention to the risk of a no-deal Brexit: the consensus is that sterling could fall by 8% in the unlikely event that it happens. UK unemployment steady at a low 4.2%, wages going up by 2.5% a year. On Wednesday the headline rate of inflation failed to deliver the expected increase. Analysts had forecast an acceleration of consumer price index inflation from 2.4% to 2.6%. They saw the upward pressure coming mainly from higher fuel and energy costs. The Office for National Statistics confirmed that these were indeed “the largest upward contributions” but they were balanced by lower prices for clothing and footwear. So the headline rate of inflation remained at a 15-month low of 2.4% and sterling fell to a ten-month low against the US dollar.
The EU and China have made a trade agreement which neither hit the headlines nor moved the euro. The finalised euro zone consumer price index data of 2% for June was bang on target, matching the highest reading in more than five years. Again, the euro was unmoved.
There is no direct economic link between the dollar and the Trump/Putin relationship but investors were dismayed at the way Trump seemed to have rolled over for the Russian president, fearing to bring up the sensitive issue of electoral meddling. They believe the episode could harm his party’s chances at the mid-term elections in autumn, thereby undermining the gung-ho US economic policy which they hold so dear. The other factor working against the dollar was the US retail sales figures. With monthly increases, with and without auto sales, of 0.5% and 0.4% they were not exactly rubbish, especially in view of upward revisions to earlier data. But the retail sales control group, a measure more indicative of underlying activity, was unexpectedly flat on the month. However, the US dollar was by far the most successful major currency midweek, strengthening by an average of 0.7%. The Federal Reserve chairman Jerome Powell expects that “the job market will remain strong and inflation will stay near 2% over the next several years” and “for now, the best way forward is to keep gradually raising the federal funds rate”. (Note the “for now”.) Mr Powell was careful to avoid overt criticism of the Trump trade war but he did observe that countries with open trade policies “grow faster, [with] higher incomes and higher productivity”.
It was a different story for the Aussie. The Australian employment data have a well-earned reputation for volatility, often with big swings between part-time and full-time working. The numbers this morning showed increased numbers in both of those groups, with a total of 51k more people finding jobs in June. The Australian dollar saw an immediate benefit. It went on to become the day’s top performer, adding a cent and a third against sterling. There was a curious reaction to the second quarter NZ inflation reading. At 1.5% it was lower than the forecast 1.6%, yet the Kiwi went up. It looked very much as though investors had been expecting the figure to be lower than expected.
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