At the end of last week, UK PMIs for manufacturing (55.3) and construction (50.2) were lower on the month and below forecast, but this seemed to have little impact on sterling, perhaps because investors’ focus was elsewhere.

1. Weekly Currency Round up- 9th
February 2018
At the end of last week, UK PMIs for manufacturing (55.3) and construction (50.2) were lower on the month and
below forecast, but this seemed to have little impact on sterling, perhaps because investors’ focus was elsewhere.
The focus throughout the week has been more on equity prices than exchange rates, but ecostats still had an impact.
On Tuesday, the UK services sector PMI came in a point and a quarter lower on the month, missing forecast by a
similar margin and causing the pound to dip.
The shadow of Brexit continues to loom large over the pound, and EU negotiator Michel Barnier’s visit to Downing
Street this week highlighted how far the EU and UK appear to be from any kind of agreement. Sterling was further
rattled by a report this week stating that "Brussels will have the power to punish the UK at will during the transition
period". The main news for the pound this week came on “Super Thursday” when the Bank of England released the
minutes of the Monetary Policy Committee meeting. In this case, the news was no news as the interest rate remained
unchanged at 0.5% after a unanimous vote from the MPC. There were however hints that rate rises would be on the
cards this year as the Bank of England upgraded forecasts for UK growth from 1.6% to 1.8% for this year. If the
economy progresses as forecast, the MPC highlighted that “monetary policy would need to be tightened somewhat
earlier and by a somewhat greater extent over the forecast period”.
European Central Bank President Mario Draghi addressed the European Parliament this week, but nothing he said
had any discernible positive or negative effect on the euro. He seemed no closer to ending the ECB's money-printing
asset purchase programme, saying that while inflation was heading towards its 2% target "we cannot yet declare
victory on this front". His words did, however, impact sterling, when he said the bank was making preparations for a
disorderly Brexit. Germany's Chancellor Merkel announced the formation of a coalition in which the SDP will control
the finances. After four months of discussion and significant concessions by Mrs Merkel's CDU it looks as though
Germany will once again have a government. The new coalition is likely to cut back on "austerity" and be more
generous with its financial support for Euroland.
The US dollar seems to be acting free from any correlation to the economic data. Despite generally positive figures,
including two PMI readings from the manufacturing sector, the dollar enjoyed mixed fortunes. Towards the end of
the week, figures presenting a similar outlook, including Markit’s measure showing an unchanged 55.5 and half a
point about forecast, the ISM figure beating expectations by a third of a point and a 0.7% rise in construction spending,
saw the greenback rise again as equity and bond prices took a dive. It may be that investors are looking for rate hikes
from the Fed this year; nonfarm payrolls increased by 200k in January and average earnings were up by an annual
2.9% which is a sign that the anticipated three rate hikes in 2018 may come to pass. More positive stats followed in
the week. Of the two US services sector PMIs, the one produced by Markit was on target and unchanged on the
month. The other, from the Institute for Supply Management, was up by four points at 59.9 and that is the one to
which investors pay more attention. The main, focus, though, is on the next government shutdown and the likelihood
of breaking the current deadlock within American politics.
It has been a quiet week for the Canadian dollar, other than a mixed bag of housing stats being released. The New
Housing Price Index edged lower to 0.0%, shy of the estimate of 0.1% and the first time the index has failed to post a
gain since January 2015. Housing Starts was almost unchanged at 216,000 - beating the forecast of 211,000. Today
will see the release of key employment data on Employment Change and the unemployment rate, which may cause
more of a stir, depending on whether they come in as expected or not.
The Reserve Bank of Australia announced this week that it was keeping its Cash Rate benchmark unchanged at 1.5%.
The Aussie dollar softened slightly on the news. There has also been a 0.5% monthly fall in Australian retail sales and
a widening of the trade deficit as imports went up by 6% and exports by just 2%.
The NZ dollar was helped midweek by the release of better-than-expected employment figures for the fourth quarter
of 2017. Unemployment slowed to 4.5%, the number of people in work went up by 0.5 % and the participation rate
eased incrementally to 71.0%. All the numbers beat analysts' forecasts. The Reserve Bank of New Zealand's inflation
forecast was downgraded, but the Official Cash Rate remains unchanged at 1.75% for the 16
th
consecutive month.
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