Currency Note

Topsy turvy start to week for sterling

By Paul Redmond February 27th, 2018

Topsy turvy start

As a cold snap swept across the UK on Monday, the pound started brightly by strengthening against the dollar and euro. Comments by the Bank of England’s Dave Ramsden to the Sunday Times over the weekend helped support the pound, as he hinted that UK interest rates could rise sooner rather than later. Ramsden was one of only two policymakers who opposed the rate hike in November, which lends greater significance to the comments.

A speech made by Jeremy Corbyn, in which he said that the UK should stay in the EU customs union after Brexit, also helped support the pound as it increases the chances of a soft Brexit. However, overall it was a topsy turvy start to the week for sterling as it erased its early gains against the dollar and euro. 2018 has been an extremely volatile year so far, especially for the greenback and pound.

European Central Bank President Mario Draghi addressed the European Parliament yesterday and struck an unsurprisingly cautious tone. The ECB released his opening statement prior to the meeting, which essentially called for patience and persistence with regard to monetary policy. He acknowledged the strong momentum of the eurozone’s economy, but alluded to currency volatility as a reason for upholding current policy. The recent volatility helps emphasise the importance of effective treasury risk management.

Today’s main release is the German inflation rate which is expected to drop from 1.6% to 1.5%. We will also see January’s durable goods orders in the US – can the US post yet more positive data following last week’s impressive showing?

GBP: likelihood of soft Brexit increases

The Labour party leader, Jeremy Corbyn, gave a speech yesterday in which he said that the UK should stay in the customs union after Brexit. This puts Theresa May in a difficult position, as Tories in favour of a soft Brexit can now vote with Labour to defeat any bill in line with the hard Brexiteers in the Conservative party. It looks as if it will be an interesting few weeks and it wouldn’t be a surprise to see some significant sterling volatility as events unfold.

The only release of note in the UK was the mortgage approvals, which rose for the first time in four months in January. 40,117 mortgage loans were approved in the first month of 2018, which is a healthy increase from 36,085 in December. However, it is still less than this time a year ago (although above what was expected).

Today we will see the Nationwide housing prices which are expected to dip a little from last month, but political events could be key driver of any sterling movements today; it will be curious to see if there is any fallout from what Corbyn said yesterday.

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EUR: Draghi calls for patience and persistence

On an otherwise-quiet day for the eurozone, Draghi addressed the European Parliament and said that patience and persistence were needed to for inflation to return to levels near 2%. He said the central bank believed that headline inflation will gradually increase in the future, supported by their monetary policies.

The euro began the day by weakening against sterling following suggestions that a UK interest rate rise could happen sooner rather than later, but it retraced these losses and ended up strengthening a little. Against the dollar, there was a sideways move throughout the day and there was very little movement between the pairing.

Today’s main release is the German inflation figure which is expected to dip a little to 1.5% in February from 1.6% the month before. We will also see the business confidence figure, as well as services, industrial and economic sentiment indices. Finally, we will see consumer inflation expectations.

USD: new home sales come in below expectations

Last week was a pretty stellar one for the US economy, with several pieces of data coming in above expectations. So yesterday’s main release was a little disappointing, coming in below expectations as it did. There were a total of 593,000 new homes sold in January, which was a 7.8% reduction in sales the month before. A 3.8% increase had been forecast and the figure is the lowest reading since August 2017.

Today we will have the durable goods orders for January which are expected to shrink by 2% (after growing by 2.9% in December), but the main highlight of the week comes tomorrow in the form of the second estimate of the GDP growth rate for the fourth quarter of 2017. How will it compare with the UK and eurozone’s growth?

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