24 February 2020: Sterling close to 1.30 as dollar retreats

24 February 2020: Sterling close to 1.30 as dollar retreats

Sterling close to 1.30 as dollar retreats

24th February: Highlights

  • Sterling higher as activity improves
  • Dollar shies away from 100 as data disappoints
  • Another false dawn, or the real deal?

Manufacturing output improves as services disappoint

The pound rallied on Friday as in both actual terms and comparatively, the UK economy performed marginally better than its G7 rivals.

Overall last week was mixed for the UK as the news of the new Chancellor and the likely opening of the public spending tap provided some much-needed encouragement to traders.

The pound had been drifting lower with no particular trend identified as analysts had been concerned about the level and tone of rhetoric between the UK and EU about a trade deal. French President Emmanuel Macron, who appears to have taken the UK’s departure as a personal slight commented in an interview that he thought it impossible for a trade deal to be completed by the end of the year.

Boris Johnson may not be everyone’s favourite Prime Minister despite his overwhelming majority but he has been seen to be a man of his word since his election. That means, Monsieur Macron one way or another a trade deal will be in place by 31st December, even if that is a no deal deal!

Manufacturing output rose from 50 to 51.9 in February an increase which shows that the economy is expanding and bodes well for Q1 GDP. Services output was a little weaker, it fell from 53.9 to 53.3 over the same period. This acted as a counterbalance to the better manufacturing data as the services sector is about four times the size of manufacturing.

There was a significant fall in the Public Sector Borrowing Requirement which will have also benefited the currency it fell into negative territory but the Central Bank and Treasury will not be too encouraged by a single data release and will want to see a trend develop.

It was a mixed week for the pound. It fell to a low of 1.2849 but rallied on Friday to close at 1.2962.

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100 level proving elusive

As was predicted on Friday, traders started to get a bout of altitude sickness as the dollar index closed in on the 100 on Thursday.

It was interesting that a combination of improving data in both the UK and Eurozone combined with a disappointing manufacturing output report in the U.S combined to push the greenback into a correction.

Manufacturing output fell from 51.9 to 50.8 not a particularly poor result but sufficient to make traders cut long positions built up over the week.

Services output fell significantly from 53.4 5 to 49.4. Service activity contracting may be a little more worrying for Jerome Powell and his colleagues at the FOMC.

Existing home sales were also disappointing. Fed Governor Lael Brainard commented that she favoured lower rates for longer. She believes an aggressive monetary policy into the next downturn, whenever that happens. She also believes that rates should be kept low until inflation is consistently above the Fed’s 2% target. Brainard is considered an inflation dove, so this turnaround may be considered a significant development longer term

Last week the dollar reached a high of 99.91 and closed at 99.32.

The end of the month is approaching but, yet again, we will have to wait for a few days into March until the employment report is released. Early indications of market expectations will start to be released this week.

When the market expects the worst……..beware

It is typical that just as everyone is ready to pronounce the Eurozone economy virtually finished, there is a sign of life to provide a little hope to those hopeful souls who still see a future for the region and its currency.

Any rally for the euro on Friday was mostly attributable to a weaker dollar, but the fact that output rose in February from 47.9 to 49.1 and services also improved marginally means there is life in the old dog yet. The financial markets will be well aware of trusting a single piece of data as conclusive evidence of a turnaround, but it may slow the fall of the euro somewhat.

Even the most optimistic of analysts will see that this can still be an anomaly, however, for now, the most recent data for the eurozone is positive.

Nothing has really changed for the Eurozone. Small moves in the value of the euro between economic releases, which vary little from one month to the next, provide a little volatility to day traders but the single currency is in a justified long-term downtrend and until the ECB is able to provide stimulation in addition to an agreement on some kind of fiscal union, that is likely to continue.

This week could be different again. The IFO report which provides some insight into current conditions and the business climate in Germany will be released. The business climate is expected to have weakened very slightly while current conditions have strengthened marginally.

The euro found a little support last week having fallen to multi-year lows. It reached a low of 1.0777 but rallied to close at 1.0849.

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.”