In May 2016, the Treasury published estimates of how the UK economy react over two years if the UK voted to leave. Relative to a baseline given no change, the prediction was for the economy to be 3.6% smaller, unemployment to rise by 520k, public sector borrowing to be £24bn higher and for sterling to fall by over 10%. Figures released last week showed the economy expanded by 0.5% in the fourth quarter – the strongest performance of 2017. Although annual growth has slowed a little, the level of GDP at the end of last year was only around 0.5% lower than the base case scenario. Meanwhile, the UK jobs market has been far stronger than expected, with employment rising by 102k to a new record high in the three months to November, and unemployment remaining at a 42-year low of 4.3%. The UK government continues to come under fire, as discussions around the transition deal raise divisions in the Conservative party, adding further pressure to Prime Minister May.
The ongoing discussions around the transition arrangement will no doubt continue to make news in a lighter week of economic data from the UK. The highlight of the week is Tuesday’s mortgage data, ahead of consumer confidence on Wednesday ahead of Manufacturing and Construction PMI’s which round out the week.
GBPEUR – 1.1387
GBPUSD – 1.4122
As expected, the ECB left policy unchanged at Thursday’s policy meeting and made no changes to its ‘forward guidance’. ECB President Draghi continued to take a dovish tone at the press conference, noting that domestic inflationary pressures remain subdued. The euro however continued to appreciate, hitting 1.25 against the US Dollar. Draghi also commented on recent foreign exchange volatility as a “source of uncertainty”. Amid all this ‘excitement’, Eurozone economic data played largely a secondary role with business surveys, including the Eurozone PMI and German IFO reports, signalling a strong economy as we begin 2018.
This week, we will see the first estimate of Eurozone Q4 GDP, with expectations of another solid gain of 0.6% on the quarter. Following this on Wednesday, the Eurozone ‘flash’ CPI estimate for January will be released which is likely to pull headline inflation down to 1.2% from 1.4% as a result of impacts in energy prices. A rise in ‘core’ CPI, excluding food and energy, is expected to 1.0% from 0.9%, though ‘core’ inflation has come in below expectations in recent months.
EURUSD – 1.2404
EURGBP – 0.8782
The US dollar fell for a sixth consecutive week against both the euro and the pound. Negative sentiment regarding the greenback has continued despite solid economic growth and increasing confidence in the financial markets that the Fed will raise interest rates three times this year. The dollar’s weakness was given some further momentum after US Treasury Secretary Mnuchin commented that a weaker dollar is good for trade. His comments came after President Trump approved tariffs on imports of solar panels and washing machines. Markets are assessing whether the ‘America First’ agenda represents a sea change in longstanding US economic policy regarding exchange rates and global trade.
The key data this week will be employment and wages at the end of the week. Though more importantly, on Thursday, we will see the FOMC policy decision which will be Fed Chair Yellen’s last as the boss before Jerome Powell takes the helm. It is widely expected that policy will be left unchanged. On Wednesday, President Trump holds his first State of the Union address, which will be keenly watched with reference to his recent ‘America First’ policy announcement.
GBPUSD – 1.4122
EURUSD – 1.2404