20 January 2020: Data pointing to significant slowdown

Data pointing to significant slowdown

20th January: Highlights

  • Weakening economy pushing BoE towards rate cut
  • Will Impeachment be more than a sideshow?
  • Will Lagarde or data be biggest influence over ECB

Weak data and dovish Central Bankers hit Sterling

The UK is slowing at what is becoming an alarming rate. The Brexit/election bounce is either over or not happening.

The fact that the UK is (on paper) leaving the EU next week has attracted the amount of attention that perfectly illustrates just how bored the general public had become about the whole subject. In fact, the prevarication of the Labour Party and the fact that the public would have been subjected to even more wrangling could easily have been the major reason for its stunning defeat last month.

The Government has a massive majority in the House of Commons that is only matched by the size of the job it faces to turn around the country both socially and economically.

There was more bad news on Friday as retail sales fell again by 0.8% MoM leading to a YoY rise of just 0.9%. The consumer is becoming concerned about several areas where the economy is struggling. The Bank of England meeting 30th January is becoming more and more likely to cut rates, but unless there is a greater degree of stimulus in the form of the public spending that the Prime Minister promised, it is going to be a long time before a rate cut from 0.75% to 0.50% proves sufficient impetus.

Chancellor of the Exchequer, Sajid Javid has caused alarm in Brussels and in commerce by announcing that the UK won’t “align” with EU rules on business and that the Government understands some will suffer during a “period of adjustment”.

Last week the pound was pressured by the idea of lower interest rates. It fell to a low of 1.2954, closing at 1.3015

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Solid data provides optimism

U.S. markets will be partially closed today for the Martin Luther King Day Holiday.

It is becoming more and more difficult to discern a clear path for the dollar. Following a week in which the greenback ebbed and flowed driven by various factors, the economy is labelled one day as being of concern going forward then on the next as being set for a significant rally.

This is the exact opposite of the view the Fed is trying to take. Jerome Powell continues to try to smooth the peaks and troughs by confirming that the FOMC is in a state of “constant vigil” but sees the current monetary policy stance as appropriate. The recent comments by Presidents of regional Federal Reserves back Powell’s judgement and this means that the comments following next week’s FOMC meeting will be more revealing than the rate decision itself.

Tomorrow the impeachment trial of President Trump begins. There is plenty of discussion regarding partisan voting by the Republican members of the Senate who will be voting along Party lines rather than by “conscience.

Trump, himself, is displaying his usual level of bluster but is not used to his future being out of his own hands. It will be a “seismic” shock if he is found guilty, but it must be hoped that such an event may lead to the reining -in of some of his more excessive actions. However, that may simply be a forlorn hope as campaigning for the 2020 Presidential election gets under way.

Last week the dollar index was in positive territory overall. It rose to a high of 97.58, closing at 97.37.

Can leading indicators confirm investor confidence?

Activity data and an ECB meeting are the major events this week that will affect the course of the single currency.

Members of the ECB council have been starting to “talk-up” the prospects for the Eurozone economy, using as a basis the various investor confidence surveys that emerge each month, rather that the surveys of economic activity that provide evidence of just how serious the situation has become.

It is easy to have sympathy for the ECB as it tries to create stable low inflation growth across such a diverse economic zone.

The Markit data for manufacturing and services for individual nations and the entire economy will be released on Friday, although it is certain that the ECB will have an “advance cut” of the data for their meeting on Thursday.

German manufacturing is expected to have fallen marginally from 43.7 to 43.3, although services output remains solid, likely to rise from 52.9 to 54. Overall, the eurozone is likely to show similar outcomes. Manufacturing is expected to have fallen from 46.3 to 45.1, while services rose from 52.1 to 53

Christine Lagarde chairs the first ECB meeting of the year and she will continue to highlight the (few) positive outcomes economically for the region, although she may also provide an update on measures to stimulate the economy that are still a “work in progress”.

The ECB will hope that the financial markets continue to allow time for the economic recovery which they believe is just around the corner.

The single currency has held up well over the past few weeks, driven mainly by the dollar’s activity.

Last week, it fell to a low of 1.1086, closing at 1.1093. The psychologically important 1.10 level is still some distance away, but should it be broken, the pace of the euro’s descent may well accelerate.

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.”