Economic concerns growing
14th January: Highlights
- Sterling falls on BoE expectations
- U.S. to drop China “manipulator” tag
- BUBA sees 1.1% growth in 2020
Third MPC member considering rate cut
The economic background was brought into focus by growth data that was released yesterday that showed that the UK economy grew at its slowest rate in more than seven years in November.
The uncertainty caused Gertjan Vlieghe a renowned dove on the MPC to declare in a weekend newspaper article that he would be seriously considering voting for a cut this month should the outlook for the economy fail to improve.
The Bank of England has been sidelined during almost the entire Brexit negotiation with current Governor Mark Carney struggling to get his voice heard. Now that negotiations over a trade deal are set to begin, it appears the Central Bank’s senior members have decided to remind the public, the City and the Government of their existence.
The National Institute of Economic Research delivered its estimates for UK growth over the next three months yesterday. Studies predicted that in the first quarter, the economy would be flat, this is the first time in a considerable time that the UK is predicted to grow at a slower rate that the Eurozone.
The pound fell as the economy is becoming a more significant driver for the pound. It reached a low of 1.2961, closing just below the 1.30 level.
China big winner in trade negotiations
The U.S. Treasury, headed by Secretary Steve Mnuchin who will head up the U.S. delegation to the World Economic Forum in Davos this year, has said that the U.S. is considering removing the the of currency manipulator from China in its next bi-annual review.
This is a big deal for China which has exerts a high degree of control over its currency and has lived with the currency manipulator label for many years.
The U.S. has published its list twice a year, naming and shaming those countries it considers do not allow free movement of their currency in order to gain an export advantage.
China has long been a member of this “club” so it would take a huge leap of faith to think it has nothing to do with trade talks, not that we will ever find out officially.
The dollar index was becalmed yesterday as traders considered the impact the official release, likely to take place on Wednesday, of the trade agreement will have and also the expectations for interest rates which remain unclear. It fell to a low of 97.31, closing at 97.39
EU officials continue to convert hopes to expectations
While confidence and expectation surveys are beginning to predict the first “green shoots” of recovery, activity remains sluggish at best.
There are extremely high hopes being placed on the ability of the ECB and EU Commission to be able to find the political solution to the issue of greater fiscal union. Since it will draw man reluctant members into a closer, almost Federal region it is hardly surprising that certain countries are concerned.
While a degree of optimism may have an effect on consumers who ultimately hold the purse strings, but, for now, prefer to buy imported goods, the major agencies like ZEW who prefer facts may take some time to come in line with the German Central Bank.
If the region can avoid falling into recession in Q1, then there is hope for a recovery, but a recession at this point may turn out to be long and damaging for both investment and bank’s performance and could ultimately, prove difficult to escape from.
The euro remains mired in its relationship with the economy. Yesterday it traded in a narrow range as the market looks forward to next week’s ECB meeting although President Christine Lagarde will make a speech lat this Thursday afternoon. The euro made a high of 1.1148, closing at 1.1112
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”