Market Info

Downing Street tries to clarify UK Brexit stance as GBP pulled between domestic politics and BoE meeting later this week.

05/02/2018 | OzForex

Friday 5 February

British Pound (GBP)

GBP/USD actually finished unchanged last week having been as low as 1.3995 on Tuesday and as high as 1.4275 on Thursday. After Friday’s US employment report, GBP/USD fell a full cent to end the week roughly where it had begun at 1.4125 and it is only modestly below that level after a fairly quiet session this Monday morning in Asia.

The weekend Press in the UK was full of rumours of a leadership challenge and pressure on the PM to clarify her own intentions. Finally, on Sunday evening, Downing Street ‘sources’ gave an on the record but anonymous statement which said, “It is not our policy to be in the customs union. It is not our policy to be in a customs union.” The statement went further than Prime Minister May who, on Friday, refused to rule out involvement in a customs union when questioned during her visit to China. She had simply told journalists then, “What I want to do is ensure that we have got the best possible trade arrangements with China and with other countries around the world.”

For the week ahead, there’s a Bank of England MPC meeting on Thursday. In his appearance before a House of Lords Select Committee last Thursday, BoE Governor Carney hinted that the Bank is preparing to upgrade the forecasts in its Inflation Report. “I would expect that in 2019 we will see a pick-up in this economy all things being equal – strong global growth, greater certainty... A disorderly Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.” Whether the Bank’s relative optimism will outweigh the political negatives, however, remains to be seen. With the UK service sector PMI due at 9.30am local time, the Pound opens this morning at USD1.4120, GBP/AUD1.7790 and GBP/NZD1.9325.

US Dollar (USD)

USD/GBP expected range: 1.3995 – 1.4220

What a dramatic week that was for the US Dollar. It opened on Monday with its index against a basket of major currencies at 88.75, hit a best level of 89.25, but by Thursday evening was down at just 88.27; only a tiny fraction above its Davos low. In the first four days of the week, neither President Trump’s State of the Union Address, strong incoming economic data, or a somewhat more hawkish FOMC Statement could offer any support to the currency.

Having spent all week completely ignoring very strong incoming economic data and being totally unmoved by higher US bond yields, it was not until Friday that the USD finally snapped higher after the employment report showed that average earnings growth had risen to 2.9%; the highest since 2009. Non-farm payrolls were only around the average of the previous 12 months at 200,000 and the average workweek actually fell. But, with the bond market acutely sensitive to signs of inflationary pressure, the earnings number sent 10-year Treasuries up to 2.84%; a huge rise in yields of 38bp since the beginning of the month.

The USD index against a basket of major currencies was already a couple of tenths higher on Friday morning in Europe, but after the employment report was published it jumped to a high of 89.00 before settling into the New York close around 88.90. As well as a new Governor of the Federal Reserve Bank, there are plenty of his colleagues scheduled to speak later this week. Even arch-dove Kashkari on Friday noted that he saw inflationary signs in the labour data and it will be interesting to see if the speakers have soothing words for stock market investors or focus, instead, on the continued normalization of US monetary policy. The USD index opens in London this morning at 88.85 with 10-year Treasury bond yields at 2.86%.

European Euro (EUR)

GBP/EUR expected range: 1.1245 – 1.1390

The euro had a week full of very positive economic news and, crucially, no attempt from anyone on the ECB Council to try to talk it lower – other than the usual language about excessive volatility which traders have learned to take in their stride. EUR/USD began the week around 1.2425 and having been as low as 1.2345 and as high as 1.2515, it finished on Friday at 1.2455 as it withstood the USD surge better than most of the other major global currencies we follow closely here.

Economic news in Continental Europe continues to be extremely positive. Real GDP in the Eurozone rose 0.6% q/q in Q4, slowing slightly from an upwardly-revised 0.7% in Q3, in line with the consensus. It was the 19th consecutive quarter of growth in GDP and put the euro region’s 2017 expansion at 2.5%. That’s better than had been anticipated by the European Central Bank, and it’s a pace the region hasn’t seen since before the financial crisis in 2008. Inflation continues to lag well below the ECB’s target of “close to, but just below 2%” but there was a big rise in France last month which offset some of the softness in Germany. Oil prices and a rapid pass-through into CPI through petrol prices are now perhaps key to near-term progress towards the inflation target.

This Monday morning in Europe brings the service sector purchasing manager surveys and traders will be looking to see if the strength in manufacturing has been replicated elsewhere in the economy. The EUR opens in Europe this morning at USD1.2455 and GBP/EUR1.1335.