After enjoying the after effects of an agreement on the Brexit divorce bill last week, the pound found itself on shakier ground this week. David Davis’ comments that the deal would be “Canada plus plus plus,” was immediately contradicted by the EU. Inflation was reported at 3.1%, requiring the Bank of England governor to write to the chancellor. Later in the week, parliament took back control of the Brexit process when it voted narrowly in favour of an amendment that will give it the final say in approving Downing Street’s deal with the EU. Although this adds a further layer of potential uncertainty, investors eventually decided it was a positive outcome for sterling, which was an average of 0.2% higher on the day. This is likely to be because they were relieved that it was more likely to result in closer future involvement with the single market. Investors have never been keen on the prospect of Britain “crashing out” of its relationship with Europe and they saw yesterday evening’s vote as diminishing that prospect.
The euro had a more positive and straightforward week. The European Central Bank (ECB) has lifted its economic growth forecasts as growth across the eurozone picks up. It now expects the eurozone’s economy to grow 2.4% this year, ahead of its previous guidance of 2.2%. The bank also kept its main interest rate at zero and confirmed its asset purchase programme would drop from €60bn to €30bn a month in January. The bank also raised its GDP growth forecast for next year to 2.3% from 1.8%, and for 2019 to 1.9% from 1.7%.
More drama was to be found across the Atlantic. Last week concluded with a positive employment report – figures the monthly increase of 228k in nonfarm payrolls meant 31k more jobs than predicted. But earnings fell short of forecast, rising by an annual 2.5% instead of 2.7%. The Republicans met with defeat at the polls this week which cast a shadow of doubt on the proposed tax bill. Voters in Alabama delivered an unexpected blow to Donald Trump last when they rejected his senatorial candidate, picking instead a Democrat for the first time in a quarter of a century. The result damaged the Republicans’ Senate majority and, with it, the dollar. It will leave the ruling party with 51-49 majority in the Senate, potentially hindering the passage of the president’s tax cuts and any other legislation he might propose. The dollar weakened when the US data showed headline inflation rising to 2.2% while core inflation slowed to1.7%. Janet Yellen made what could be her final public appearance as chairperson of the US Federal Reserve. She held a press conference to discuss the Fed’s almost universally-expected decision to increase the Funds rate and issued a note of caution that the proposed “giant” tax cuts will increase the national debt without providing “a gigantic increase” in growth.
The Canadian dollar received a shot in the arm after Bank of Canada governor Stephen Poloz said the central bank is growing “increasingly confident” that the economy will need less stimulus over time. The loonie had its best day in two weeks after the remarks, rising 0.8% against the US dollar. Poloz believes the Bank of Canada will continue with its cautious approach, but confirmed that the Canadian economy had made “tremendous progress.” and is approaching full potential.
More optimism was found down under, where the Australian dollar benefited from stronger-than-expected employment data and investors responded positively to the appointment of Adrian Orr, the CEO of the NZ Superannuation Fund, as governor of the Reserve Bank of New Zealand. The nomination has reassured investors that the new Labour government in Wellington will pursue a fairly conventional economic policy. Mr Orr is a classically-trained economist with previous experience at the RBNZ and will take up his post in March 2018.
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