Euro Weekly 4 October 2018
GBP: Q2 GDP growth in the UK came in at 0.4% as expected, but the accompanying numbers caused some problems for the pound. Business investment, which should have increased by 0.5%, fell by 0.7% in the quarter. The current account deficit widened by 29% to £20.3bn. Crucially, first quarter growth was downwardly revised from 0.4% to 0.1%, cutting year-on-year growth from 1.3% to 1.1%. Sterling lost an average of 0.4% on Friday after the news broke. The UK manufacturing data did give the pound a boost early in the week, however. The pound rose up against USD and the euro on the news that September saw the sector’s IHS Markit/CIPS purchasing managers’ index (PMI) rise to 53.8, an improvement from August’s 53. The pound had a positive day, strengthening by an average of 0.2%. The big news this week was at the Conservative Party Conference and sterling danced its way to a 10-day high versus the euro off the back of PM Theresa May’s moves at the Conservative Party Conference. This is despite no new detail and much of the same rhetoric from the PM, but markets were looking for a simple, uneventful address after May’s previous two speeches saw the sterling stumble. Ireland’s support for her Custom’s Plan also helped pop the pound back up to the top, with this intervention seen as a serious sign of support ahead of the crucial EU Summit on October 18th.
EUR: The euro had a tricky, although not impossible week. Although headline euro zone inflation was on target at 2.1%, several of the other measures missed the mark. Core Euroland inflation slowed from1.0% to 0.9%. The big issue was the Italian budget deficit. Antipathy between Italy and the EU was highlighted in the media and the euro jumped almost half a cent higher in the early hours on a report that the deficit would narrow in the next couple of years. The recent reports suggest the drama is over and Italy’s government is moving away from its initial 2.4% deficit per year from 2019 to 2021 after EU pressures. With a national debt of €2 trillion, a fight with Brussels could concern markets and investors. But with anti-establishment Five Star Movement and right-wing Northern League winning Italy’s recent election with a promise of pushing back on EU rules, eurosceptics in the country may see Tria’s concession as unsavoury.
USD: While the media has been focused on the controversial Kavanagh hearing, the US forged ahead with its new iteration of NAFTA, now the USMCA, or United States Mexico Canada Agreement. There were more benefits for the Canadian dollar and the Mexican peso but the successful conclusion of often tense negotiations bolstered the US dollar. The good news was needed as there was little in the ecostats to provide assistance; personal consumption expenditure (CPE) was flat on the month. Manufacturing PMI America’s ISM measure was the highest of the figures releases from around the world at 59.8 but there, too, any positive impact was neutralised by the number being lower on the month and below forecast. However, the dollar remained king towards the end of the week as any inkling of a bounce in the pound fell back to a September low after 10 year US yields rose to the highest point in seven years, with 30-year Treasury bond reaching its highest level since October 2014. Federal Reserve Chairman Jerome Powell said that he could see the Fed raising interest rates beyond that of the ‘neutral’ level. The 10-year rate is of significant interest given that it sets the rates for many everyday Americans looking for business and consumer loans, crucially home mortgages.
CAD: The USMCA was much-needed good news for the Canadian dollar. The Canadian dollar and Mexican peso both began to strengthen on Thursday and carried on the process ahead of the weekend. Compared with Thursday morning the peso is 2.4% firmer against sterling and the Loonie is up by 2.5%. Most of those gains arose late on Friday last week. The Canadian dollar continued to make headway early this week, adding another third of a cent. Whilst it couldn’t quite hold back the greenback, the Canadian dollar performed better than all the other G10 currencies with the exception of sterling.
AUD / NZD: The Reserve Bank of Australia kept its benchmark cash rate unchanged at 1.5% and its statement offered no hint that an increase is in the pipeline. The statement knocked the Aussie back a little but it was still fractionally ahead on the day. With talk of “gradual” and “sustainable” the RBA continued to allow investors to believe that the next interest rate increase might well not appear before this time next year. Whilst it effectively amounted to no change in market guidance, the reminder dented the Aussie slightly. The New Zealand dollar was struggling this week; the kiwi fell close to half a cent to a low of 64.7 US cents in the past 24 hours, the lowest point since February 2016. It held steady against the Australian dollar, but is also down at its lowest level against the British pound, and a basket of currencies. There are concerns that this move may be reflected in further petrol price rises
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