The British pound (GBP, sterling) strengthened despite worrying data on future investment and the swift progress towards Brexit. Good economic news from the US didn’t do much for the dollar (USD) however, as the markets were disappointed by a perceived lack of urgency on interest rate rises. Europe’s biggest economy at least met and in some cases beat expectations, but it wasn’t enough to prevent the euro (EUR) falling against the pound.
GBP: Sterling remains resilient
The British pound has been resilient this week gaining slightly against the euro and US dollar despite cracks appearing in the once-robust post-referendum economy. The week started with political focus returning as the House of Lords discussed whether to approve the Brexit bill. Also in Westminster, Bank of England (BoE) governor Mark Carney testified before the Treasury Select Committee. In testy exchanges and in stark contrast to the dire warnings he issued before the referendum, Mr Carney acknowledged that the UK’s divorce from the European Union (EU) may yet proceed smoothly. This would open a path for higher interest rates.
In terms of economic data, the second reading of the final quarter of Gross Domestic Product (GDP) was revised upwards to 0.7% from 0.6%. Another key piece of economic data was released in the form of the business investment figure. Unlike GDP, which is backward-looking, business investment is forward looking in terms of the effect on the economy. This number fell by 1% against an expectation that it would hold at a constant level after the previous reading was revised downwards.
It is a quiet end to the week today, but next week we have the key Purchasing Managers Index (PMI) for the manufacturing, construction and all-important service sectors.
EUR: Positive data fails to boost euro
In a week of significant data releases worldwide, the Eurozone played its part with key data. Germany and Europe saw their PMI figures for manufacturing, services and a composite of the two, beat expectations on Tuesday. Germany was the focal point of data releases from the continent for the rest of the week, with significantly better sentiment data from the Ifo released on Wednesday and the country’s GDP meeting expectations yesterday. Despite the broadly positive data, especially from the bloc’s most powerful economy, the euro (EUR) has fallen over the course of the week against both the dollar (USD) and the pound. Unfortunately for the single currency, the simmering Greek debt crisis and the increasing likelihood of a closely fought campaign in the French presidential election weighed it down despite the data released.
Today sees the week close with low-impact data releases from Italy and France. Although unlikely to move markets on their own, the political events already described do have the potential to cause even more volatility within euro markets.
USD: Positive data but FOMC cool on rate hike
The US housing market strengthened further in January as existing sales rose 3.3%, hitting a 10-year high as buyers shrugged off higher prices and mortgage rates. The US stock market has continued to go on to fresh highs while oil prices are continuing their upward movement.
The Federal Open Market Committee (FOMC) minutes have indicated that an interest rate hike could come very soon, but they didn’t help push the current market pricing at 25% probability of a rate hike as the comments seemed to lack urgency. Comments from the new US Treasury Secretary Steve Mnuchin, suggested that any policy changes are unlikely to have any influence until the latter part of the year. Investors were hoping that there would have been more progress by now on US tax reform and public spending but neither seem to be on the immediate agenda.
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