Market Info

US President announces trade tariffs, sends stocks and USD lower. GBP awaits Prime Minister’s keynote Brexit speech.

02/03/2018 | OzForex

Friday 02 March

Great British Pound

The pound’s bad week got even worse on Thursday, though the pace of its losses was much slower than over the previous few days. The GBP/USD exchange rate fell through a well-watched level of technical support from the February 9th low around 1.3785 and it traded all the way down to 1.3720 by lunchtime in New York. It finished the day up against both the Aussie and Canadian Dollars, however, to leave it off the bottom of our one-day table. The overnight session in Asia has been unusually quiet and GBP/USD has settled in the high-1.37’s.

The UK manufacturing PMI survey was released yesterday. At 55.2, Purchasing Managers’ Index fell to an eight-month low and lost further ground after hitting a 51-month high last November. Manufacturing production increased at the slowest pace for 11 months in February, with decelerations seen across the consumer, intermediate and investment goods sectors. Brighter news was provided by the trend in new orders, which rose at a faster pace than in January. Companies indicated that domestic demand strengthened, while new export business rose at a solid (albeit slower) pace. Markit commented that, “The February survey provided mixed signals on the health of the UK manufacturing sector. The PMI’s Output Index fell to its second-lowest level since the EU referendum and, based on its past relationship with official ONS data, is consistent with only a subdued 0.4% quarterly pace of growth in production volumes. This would represent a marked downshift from the 1.3% increase signaled for the final quarter of 2017, providing a further brake on the rate of expansion in the wider economy.”

Today we’ll get the UK construction PMI and the risk is that the index falls from 50.2 in January to somewhere in the high-49’s. Statistically, this is little changed on the month, but in terms of presentation it could be much more negative. If it happens, Press reports will be of contraction, falling output and even recession in the building industry. Also today, Prime Minister Theresa May is scheduled to give a major speech, in which she is due to outline the government’s plan for a new post-Brexit relationship with the EU. The very bad weather has caused the speech to be moved from Newcastle to the Mansion House in London. Briefings suggest she will make clear that Britain is aiming at a free-trade deal with Brussels, not a customs union, but will insist it should be “the broadest and deepest possible agreement, covering more sectors and cooperating more fully than any free trade agreement anywhere in the world today”. As ever, what matters more is the reaction in Brussels…

US Dollar (USD)

GBP/USD expected range: 1.3700 – 1.3880

The USD index hit a 6-week high of 90.50 on Thursday morning as stock markets continued to trade lower and the VIX index of volatility hit a 2-week high of 19.5. Early in the NY afternoon, President Trump announced tariffs of 25% on imported steel and 10% on aluminium products. This surprise move sent stocks plunging once more, with the DJIA down more than 500 points and the VIX index above 20. This time, however, the USD did not respond positively. Amidst fears of retaliatory action from other countries, the index gave back around half a point to 90.00 and has spent most of the overnight session in Asia in the high-89’s.

There were plenty of US economic statistics released on Thursday. Personal income rose 04% in line with consensus expectations but spending was weaker at -0.1% m/m. The core PCE deflator which is the Fed’s preferred measure of inflation rose 0.3% m/m to leave the annual rate unchanged at 1.5% whilst the headline rate was also steady at 1.7%. Weekly jobless claims, meantime, fell 10k to just 210k; the lowest since 1969. As for the ISM manufacturing survey, the headline jumped from 59.1 to 60.8; the highest reading since May 2004. Details might not have been quite so spectacular though the stand-out was a 5-point jump in employment to a 4-month high. After all the data, the Atlanta Fed revised up its forecast of Q1 GDP from 2.6% to 3.5%.

Fed Chair Jerome Powell gave the second part of his semi-annual monetary policy testimony amidst suggestions that he might try to rein-in expectations of a more aggressive pace of interest rate increases. Instead, he said that four rate hikes this year comes under the definition of "gradual". Powell said risks are “more two-sided” now than early in the recovery from the financial crisis, adding that “the thing we don’t want to have happen is to get behind the curve.” But he said at this point the Fed could continue “to gradually raise interest rates ... That is the path we have been on and my expectation is that will continue to be the appropriate path.” Reinforcing Powell’s message, New York Fed President William Dudley said at a conference in Sao Paolo that, “If you were to go to four 25-basis-point rate hikes, I think it would still be gradual.” The only US number scheduled for release today is the University of Michigan consumer confidence report. The USD index opens this morning in Europe around 89.95.