The Pound struggles on
Sterling weakened last week as data showed an unexpected slide in British industrial output, clouding the outlook for the UK’s economy as it prepares to leave the European Union. In the first full trading week since Britain triggered Article 50 – its notification to leave the EU – the Pound lost ground against the Dollar and the Euro in moves analysts said were part of a re-appraisal for monetary policy.
Sterling has been helped in recent weeks by expectations that the Bank of England might consider a rate rise to rein in inflation, but comments by policymakers last week have played down that prospect. Data on Friday showed industrial output fell 0.7% in February, worse than all forecasts in a Reuters poll of economists that pointed to a 0.2% increase following a 0.3% decline in January.
Separate figures showed Britain’s goods trade deficit unexpectedly touched a five-month high in February, and January’s deficit was revised upwards too, according to the Office for National Statistics. The Pound is set for a 1.3% weekly fall, its first decline in four weeks. It was also 0.3% lower at 85.66 pence per Euro on the day, having shed around 1% on the week – its worst period in four weeks.
Friday saw the March US labour market report – Non Farm Payrolls came in at 98k, nearly 50% less than the market expected, while the unemployment rate unexpectedly dropped to 4.5%, the lowest level since 2007. Wage growth was in line with expectations at 2.7%.
The initial market reaction was a major drop in US Treasury yields, a slight moderation in the US Dollar and a drop in US equity futures, which point to a lower open for US indices at the end of this week. Overall, the market is taking this report as a sign that the US economy may not be as strong as initially thought and the Federal Reserve will ease off hiking interest rates. We think that this is incorrect for a number of reasons.
German industrial production data was stronger than expected for February and there was a robust trade performance for the month with 3.1% export growth over the year. However, the overall impact was limited ahead of the US jobs data. This helped the Euro gain back some of its losses on the day. It’s going to be a quiet week for economic data releases from the Eurozone with the Centre for European Economic Research (ZEW) and industrial production on Tuesday.
The March currency reserves data recorded an increase in the Swiss Franc to CHF683bn from CHF668bn previously which suggested that the National Bank had again been intervening on a constant basis to prevent Franc appreciation. There was also further speculation that the National Bank could shift policy and allow the Franc to gain ground. The Euro, Pound and US Dollar were unable to make any impression on the Franc.
Data to Watch: 2:30am AUD Home Loans (Feb), Investment Lending for Homes (Feb). 10:45pm NZD Electronic Card Retail Sales (MoM) (Mar), ECRS (YoY) (Mar). N/A USD Labor Market Conditions Index (Mar).