Tuesday 21 November 2017

Daily Market Update: Sterling hits a 7-year low against the dollar

Canary Wharf financial district. REUTERS/Hannah McKay
Canary Wharf financial district. REUTERS/Hannah McKay

Richard Ramsey

Yesterday financial markets digested the weekend’s political developments regarding the EU referendum.

Traders reacted by selling the pound with sterling falling to a 7-year low against the dollar. A week ago GBP/USD was trading at $1.45 and was still above $1.44 late on Friday. However, by lunchtime yesterday cable fell to $1.4058 before recovering to $1.413 were in currently trades. EUR/GBP had another choppy session too hitting 78.4p lunchtime yesterday. However, the currency pair has fallen back to 77.8p this morning following a disappointing German IFO survey impacting on the sentiment towards the single currency. EUR/USD has fallen by 1% over the last 24 hours falling from $1.11 to just below $1.10 as I write.

A UK exit (Brexit) from the European Union would be negative for the British economy and its standing among investors, according to Fitch Ratings and Moody’s Investors Service. Moody’s said it would put the UK on notice for a possible downgrade if Britons vote to leave the bloc in a referendum on June 23. Fitch said uncertainty in the event of a so-called Brexit would hurt business confidence and curtail investment. Britain is rated Aa1 at Moody’s and AA+ at Fitch, both the second-highest investment grade.

There are no UK releases scheduled today. However, Mark Carney’s testimony to Westminster’s Treasury Select Committee will be closely monitored. The Bank of England Governor will be accompanied by a number of his MPC colleagues. Today’s hearing will be on the outlook for the UK economy and monetary policy. This follows the BoE’s cut in its near-term forecasts for growth and inflation. Brexit remains the hot topic of the moment so we can expect MPs to lob a few questions in on this subject today.

The health of the Eurozone’s largest economy, Germany, is in focus today. The backward looking Q4 GDP growth rate was confirmed at 0.3% q/q in line with the earlier estimate. However, there were a few surprises in the GDP breakdown. There was an upside surprise with capital investment, which accelerated from 0.1% q/q in Q3 to 1.5% q/q in Q4. However, the global economic slowdown is becoming evident within Germany’s exports, which declined by 0.6% q/q in Q4. The latter represented the steepest quarterly fall in exports in three years. Subdued export performance looks set to continue in Q1 going by yesterday’s flash manufacturing PMI. Manufacturing activity slowed from 52.3 last month to 50.2 for February, just above the expansion threshold (>50). This latest figure represented a 15-month low. Meanwhile Germany’s services sector maintained its momentum in Q1 with February’s PMI exceeding expectations with a 55.1 print. However, there has been more disappointing German data with the influential IFO survey signalling a larger than expected drop in business confidence in February. The overall business climate index slipped to a 14- month low. While the current conditions component actually improved, this was more than offset by a notable drop in the forward looking expectations component. The latter fell to its lowest level since December 2012.

The Eurozone’s second largest economy isn’t faring too well either. Yesterday’s French flash composite PMI fell into contraction territory in February (49.8) for the first time in 13 months. The respective services and manufacturing PMIs were marginally below and above the 50 threshold, respectively. The slowdown in the French and German PMIs naturally pulled down the Eurozone PMIs too. The Eurozone manufacturing PMI slowed from 52.3 in January to 51.0 – a 12 month low. The equivalent services survey saw activity slow from 53.6 to 53.0 – a 13 month low. The manufacturing slowdown is also evident in the US with Markit’s latest flash manufacturing survey. The pace of activity slowed from 52.4 in January to 51.0 for February. This represents the weakest reading since the series began in February 2013. This afternoon’s US economic data focuses on the housing market and consumer confidence.

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