18 Feb 2019: Economy and Brexit vying for control

Economy and Brexit vying for control

February 18th: Highlights

  • Sterling shrugs off no-deal fear as retail sales stronger in January
  • Dollar weakens as manufacturing data points to slowing economy
  • Euro recovers from three month low on dollar weakness

Sterling gains as retail sales improve sentiment

The pound had a complicated week last week. The Brexit stalemate remained and Parliament rejected the Prime Minister’s Plan B (which is pretty much the same as Plan A but a month closer to March 29th) and economic data was mixed at best.

Traders have abandoned a long-term plan for the outcome of Brexit, preferring, for now, to deal with factors driving the currency on a day to day basis. It is generally agreed that there is a big move for the pound on the horizon but its direction is unclear.

Every day that passes where Mrs. May clings to her deal as the only one on offer brings a no deal conclusion a step closer with significant negative ramifications for the pound.

However, despite Brussels’ continued denial of any request to reopen negotiations, the consequences of a no deal outcome cannot be lost on the 27 remaining states and traders remain sufficiently optimistic to adopt a “wait and see” stance.

The economy will take centre stage again today as employment data is released at 9:30am UK time. The unemployment rate is expected to have fallen below 4% which will please the Bank of England, but with wage inflation likely to remain at or close to 3.3% price pressures will be starting to build despite last week’s fall in inflation.

The fall in inflation, which reached 1.8% in January has masked price pressures due to the continued fall in the oil price which has led to lower wholesale energy prices.

It is hard to predict what the outcome of Brexit “negotiations” might be this week and with another series of votes to take place in Parliament next week, it is likely that economic data will be the more significant day to day driver.

On Friday, the pound rallied versus a weaker dollar (see below). It reached a high of 1.2898 and closed at 1.2891. It has opened higher in Asia this morning trading just above 1.2900.

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Dollar falls on poor retail sales and improved risk appetite

The dollar index’s recent inability to break and hold above 97.00 continued on Friday as what had looked like a day for continued optimism was broken by a poor piece of economic data. It is clear that the Fed’s decision to pause their rate hike cycle is being proved correct by the subsequent releases of economic data.

January’s retail sales numbers which were released on Thursday were far lower than market expectation and this was followed by a similar disappointment in industrial production and capacity utilization which was released on Friday.

Industrial production fell by 0.6% in January while capacity utilization was at 78.2%. These were lower than December’s +0.1% and 78.8%.

It is a holiday in the U.S. today for President’s Day so there is no data to move the market. Any drivers for the dollar will come from trade talks with China which seem to have got back on track. The expectation of a successful resolution of the issues between the U.S. and Chinua drove investors back to riskier assets on Friday which saw some dollar selling.

The dollar index fell to a low of 96.83, closing at 96.87. It has continued to fall in Asia this morning, so far reaching a low of 96.70.

Euro in dollar’s shadow as economic woes continue

The euro remains friendless in financial markets as, despite Germany’s “lucky escape’ from a technical recession, traders see little reason to buy the single currency.

For now, the euro is simply mirroring the dollar as it moved away from a three-month low versus a weakening greenback on Friday. It reached a high of 1.1311 and closed at 1.1298. It has moved marginally higher this morning as the dollar continues to fall.

This week will see the release of further data for individual Eurozone members that is unlikely to raise expectations.

Tomorrow will see the release of an economic sentiment index in Germany which is expected to have fallen to its lowest in more than a year. On Wednesday producer price data will be released also by Germany which is expected to have fallen by 0.2% pointing to a continued economic slowdown.

French and German manufacturing activity indexes will be released later in the week and they are both expected to show significant falls from December.

The ECB next meets on March 7th and it is expected that they will announce further economic stimulus measures but until then the single currency is likely to continue to suffer from weak economic data both Eurozone-wide and from individual members.

Have a great day!

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.”