Euro Weekly 3 August 2018
The big news for the pound this week was the announcement of the Bank of England (BoE) to finally raise interest rates to 0.75%. Prior to the announcement on Thursday, there was little movement in the pound as the markets appeared to be holding their breath and waiting for the arrival of ‘Super Thursday’. After much anticipation, the BoE Monetary Policy Committee (MPC) voted unanimously, 9-0 to raise the interest rates for only the second time in a decade, it was announced today. The last increase was in November 2017, when the MPC increased the rate from the record low of 0.25%. The move takes the Bank Rate to its highest level since 2009. Predicted growth for the second quarter is coming in at just 0.4% but solid employment growth, steady pay growth and a rebound in consumer spending proved reason enough to deliver on the much-anticipated increase. In addition, the Purchasing Managers’ Index (PMI) jumped from 53.1 in June to 55.8 in July, the fastest rate of expansion in 14 months. The announcement struck a note of caution, however, suggesting that there unlikely to be further rate rises in the near future. Mark Carney reiterated the risk of Brexit, but while parliament remains on summer break there is unlikely to be any major news to shake the pound on this issue in the near future.
A slowing of growth is emerging in Europe. Eurostat published data which estimated that GDP growth stood at 0.3% in the second quarter, compared with the first. Quarterly growth is holding steady at 0.4% across the European Union but annual GDP growth slowed from 2.4% in the first quarter to 2.2% in the second quarter. These statistics were underscored by European Central Bank president Mario Draghi reiteration of the fact that ECB interest rates will remain at their current low levels “at least through the summer of 2019.”
In the US, Q2 gross domestic product figures showed that the economy expanded by an annualised 4.1%, equivalent to a quarterly 1.0%. This may have been the best performance in four years, but investors were expecting more after a series of bullish briefings and the US dollar lost a third of a cent in the immediate aftermath of the data’s release. The greenback did recover, however, and regained all it had lost by the time the markets had closed. The US Federal Reserve left monetary policy unchanged, but hinted that higher interest rates may be a possibility later in the year. For now, the Fed is maintaining a 1.75% – 2% target range for the federal funds rate. On the global front, President Trump announced his dissatisfaction with the current tariffs on Chinese goods and indicated that they may increase in the near future; the suggestion of further escalation in the trade war may turn out to be bad news for the greenback in the longer term but after the announcement it was flat on the day against sterling but gained a third of a cent to the euro.
The news that Canada had been excluded from trade talks between Mexico and the US meant that the Canadian dollar lost some ground early in the week. Monthly GDP data showed that Canada’s economy expanded 0.5% in May, however, and that helped the Loonie to rebound. Growth in Canada is widespread, with statistics showing positive numbers in 19 of the 20 sectors measured by Statistics Canada. Hints that the trade negotiations between the US and China may be restarted in the near future also gave the Canadian dollar a bit of a boost, although it will take more than a rumour to erase the fear and impact of a full scale trade war.
The Australian dollar edged slightly higher this week after a rebound in Australian building permits and improved local retail sales. The Australian trade surplus rose to $1.9 billion from $725 million and beat the analysts’ estimate of $900 million, but this didn’t appear to help the Aussie. This is largely due to the fact that the surplus was attributed to a contraction in imports, rather than an expansion in exports.
The Reserve Bank of New Zealand took a dovish approach in their policy outlook statement. The shift is reflected in the 30-day bank bill futures and the fact that a rate hike is unlikely any time before the fourth quarter of the year weighed on the Kiwi dollar. Possible escalations in the trade war between the US and China also caused the New Zealand dollar some trouble. New Zealand has an export-led economy and there is concern about the impact of further and higher tariffs in the future.
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