Sterling hits three-week high on draft EU proposal
03/Feb/2016 • Currency Updates•
UK data announcements this week, which painted a very mixed picture of the strength of the economy, were camouflaged yesterday by the announcement that the European Council had unveiled a draft deal to change Britain’s relationship with the European Union. This could pave the way for a referendum as early as June.
Markets welcomed the news and, as a consequence, Sterling rallied to a three-week high, having recently hit a seven-year low against the US Dollar.
The proposals addressed all four areas where Prime Minister David Cameron had demanded reform, outlining that Britain wouldn’t have to integrate further politically with the EU if it voted to stay in. If an agreement on a final deal can be achieved with the other 27 EU leaders at a gathering in Brussels on 18-19 February a referendum in the summer remains a strong possibility.
The Euro ended yesterday’s session mostly unchanged against the Greenback, despite further encouraging signs of a tightening in labour market conditions after unemployment in the Euro-area declined to its lowest level since 2011.
In an otherwise mostly quiet trading day for the major currencies, the Japanese Yen strengthened after another decline in oil and stock markets caused investors to pile back into safe-haven currencies.
Euro-area service sector growth and European Commission growth forecasts this morning will be the highlight of trading today. Markets, investors and businesses will then turn their attention to a very heavy back end to the week in terms of data.
Thursday will see the Bank of England quarterly Inflation Report, followed by Friday’s US nonfarm payroll figures. Both of these announcements will likely result in volatility and possible hedging opportunities for UK businesses.
Major currencies in detail:
Sterling ended the day 0.2% higher versus the US Dollar.
News of the draft EU deal kept the Pound relatively well supported yesterday afternoon, with the currency clawing back ground after weak construction data released in the morning. The PMI from Markit dipped to 55 from 57.8, below even the lowest of forecasts.
The surprisingly poor reading contrasts with the stronger-than-expected manufacturing data on Monday and paints a very mixed picture of the UK’s economic performance in the first month of the year.
Service sector growth this morning should provide a better indication of overall UK economic growth.
The Euro traded mostly within a narrow band, ending 0.1% lower against the US Dollar.
Economic data in the Eurozone was mostly mixed on Tuesday. There were some further encouraging signs of an improvement in the labour market after unemployment in the Eurozone unexpectedly dipped to 10.4% from 10.5%.
Increases in the jobless rate in Italy and Spain were offset by lower unemployment in Germany, which fell to 6.2% last month, its lowest level since soon after the fall of the Berlin Wall in 1990.
In stark contrast, inflationary pressures in the economy remain nowhere to be seen. Producer prices fell by 3% on an annualised basis having declined by 0.8% in the month to December.
This marked the largest monthly drop since the European Central Bank first announced its large-scale quantitative easing programme in January 2015. This, in our view, provides further evidence that the ECB is almost certain to announce additional easing measures at its next meeting in March.
Greenback was little moved on Tuesday, with a lack of major announcements in the US meaning that the US Dollar index finished unchanged.
Announcements in the US remain on the light side until Friday’s nonfarm payroll release. Small business economic optimism ticked upwards slightly to an index of 47.8 from 47.3, although did little to materially impact the Dollar.
Investors remain focused on the Federal Reserve, with the latest data and global financial turmoil causing many to push back expectations for the next US rate hike. These concerns were amplified further by comments from Fed Vice Chair Stanley Fischer, who warned the US economy was not immune to a slowdown in the global economy.
Rest of the world
The Reserve Bank of Australia held its interest rate steady on Tuesday, although left the door firmly open to a rate cut amid worsening economic conditions in China, the country’s major trading partner.
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