Cable bounce, a flash in the pan
Sterling drifted upwards on Friday, a welcome bounce following a rough week that saw the UK’s currency take a haircut versus the US Dollar. Industrial production fell 1.3% in December; more than the 0.9% fall forecasted. Output was undermined by the decline in crude oil output while manufacturing output increased 0.3% on the month, in line with market expectations.
The Pound faded following the data and there was more concerted pressure ahead of the US market open as EU Chief Brexit Negotiator Barnier stated that substantial disagreements remained and that a transition deal is not a given. Barnier’s tough rhetoric increased Brexit negotiation concerns with Sterling dipping to near 1.3760 against the Dollar while the Euro advanced to highs around 1.1260.
Sterling recovered some ground later in US trading as equities rallied and risk aversion faded slightly. Bank of England chief economist Andy Haldane stated that there was no rush to raise interest rates and the latest Visa data reported a 1.2% annual decline in consumer spending for January.
The next major UK data will be the latest UK inflation data, due out on tomorrow at 9.30am.
Friday last week, US wholesale inventories grew 0.4% m/m in December. Further, Kansas City Fed President Esther George took a Dovish stance, stating three three hikes this year and next would be a reasonable outlook should economic conditions stay the same.
The main talking point come the end of last week however was Dollar gains driven by moves against Sterling and less so Euro. A hawkish Bank of England could not outweigh Brexit uncertainty and weak data causing Dollar strength as Cable dropped to low 1.38’s, levels not seen since early January whilst against the Euro, The Dollar recovered to mid-1.22’s.
Outlook for the US was not however all good as Moody’s warned the US credit rating was likely to face downward pressure in the longer term. It was mentioned in particular how there was upward pressure on budget deficits despite the shorter term view was positive.
A quiet week ahead on the data front but US Inflation on Wednesday will have investors and traders attention. Recent sentiment has inflation increasing which will have a knock on effect to monetary policy, hence the importance of Wednesday.
German politics were again a significant focus during Friday following reports of fresh divisions with the Social Democrats (SPD) which could lead the membership to reject a government coalition deal. The Euro was also hampered by a liquidation of long positions as the underlying covering of short dollar positions continued amid increased market volatility and sharp moves in equities.
Data to Watch
19:00 USD Monthly Budget Statement (Jan)