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GBP steadies after sharp Brexit-driven falls. USD extends recent gains. Attention now switches to manufacturing PMI surveys around the world.

By Nick Parsons

The pound’s bad week got even worse on Thursday, though the pace of its losses was much slower than over the previous few days. The GBP/USD exchange rate fell through a well-watched level of technical support from the February 9th low around 1.3785 and it traded all the way down to 1.3720 by lunchtime in New York. It finished the day up against both the Aussie and Canadian Dollars, however, to leave it off the bottom of our one-day table. The overnight session in Asia has been unusually quiet and GBP/USD has settled in the high-1.37’s.

The UK manufacturing PMI survey was released yesterday. At 55.2, Purchasing Managers’ Index fell to an eight-month low and lost further ground after hitting a 51-month high last November. Manufacturing production increased at the slowest pace for 11 months in February, with decelerations seen across the consumer, intermediate and investment goods sectors. Brighter news was provided by the trend in new orders, which rose at a faster pace than in January. Companies indicated that domestic demand strengthened, while new export business rose at a solid (albeit slower) pace. Markit commented that, “The February survey provided mixed signals on the health of the UK manufacturing sector. The PMI’s Output Index fell to its second-lowest level since the EU referendum and, based on its past relationship with official ONS data, is consistent with only a subdued 0.4% quarterly pace of growth in production volumes. This would represent a marked downshift from the 1.3% increase signaled for the final quarter of 2017, providing a further brake on the rate of expansion in the wider economy.”

Today we’ll get the UK construction PMI and the risk is that the index falls from 50.2 in January to somewhere in the high-49’s. Statistically, this is little changed on the month, but in terms of presentation it could be much more negative. If it happens, Press reports will be of contraction, falling output and even recession in the building industry. Also today, Prime Minister Theresa May is scheduled to give a major speech, in which she is due to outline the government’s plan for a new post-Brexit relationship with the EU. The very bad weather has caused the speech to be moved from Newcastle to the Mansion House in London. Briefings suggest she will make clear that Britain is aiming at a free-trade deal with Brussels, not a customs union, but will insist it should be “the broadest and deepest possible agreement, covering more sectors and cooperating more fully than any free trade agreement anywhere in the world today”. As ever, what matters more is the reaction in Brussels…

The USD index hit a 6-week high of 90.50 on Thursday morning as stock markets continued to trade lower and the VIX index of volatility hit a 2-week high of 19.5. Early in the NY afternoon, President Trump announced tariffs of 25% on imported steel and 10% on aluminium products. This surprise move sent stocks plunging once more, with the DJIA down more than 500 points and the VIX index above 20. This time, however, the USD did not respond positively. Amidst fears of retaliatory action from other countries, the index gave back around half a point to 90.00 and has spent most of the overnight session in Asia in the high-89’s.

There were plenty of US economic statistics released on Thursday. Personal income rose 04% in line with consensus expectations but spending was weaker at -0.1% m/m. The core PCE deflator which is the Fed’s preferred measure of inflation rose 0.3% m/m to leave the annual rate unchanged at 1.5% whilst the headline rate was also steady at 1.7%. Weekly jobless claims, meantime, fell 10k to just 210k; the lowest since 1969. As for the ISM manufacturing survey, the headline jumped from 59.1 to 60.8; the highest reading since May 2004. Details might not have been quite so spectacular though the stand-out was a 5-point jump in employment to a 4-month high. After all the data, the Atlanta Fed revised up its forecast of Q1 GDP from 2.6% to 3.5%.

Fed Chair Jerome Powell gave the second part of his semi-annual monetary policy testimony amidst suggestions that he might try to rein-in expectations of a more aggressive pace of interest rate increases. Instead, he said that four rate hikes this year comes under the definition of "gradual". Powell said risks are “more two-sided” now than early in the recovery from the financial crisis, adding that “the thing we don’t want to have happen is to get behind the curve.” But he said at this point the Fed could continue “to gradually raise interest rates ... That is the path we have been on and my expectation is that will continue to be the appropriate path.” Reinforcing Powell’s message, New York Fed President William Dudley said at a conference in Sao Paolo that, “If you were to go to four 25-basis-point rate hikes, I think it would still be gradual.” The only US number scheduled for release today is the University of Michigan consumer confidence report. The USD index opens this morning in Europe around 89.95.

After a very poor week, the euro finally found a bit of support on Thursday. EUR/USD reached a low just above 1.2160 in the European afternoon; the lowest since mid-January but then rallied around half a cent back on to a 1.22 handle and was the best performer of all the FX majors in the immediate aftermath of the US trade tariffs announcement. Overnight in Asia, it has traded as high as 1.2285; its best level since Tuesday afternoon.

In economic data, the final Eurozone Manufacturing PMI eased to a four-month low of 58.6 in February, down from 59.6 in January; better than the earlier flash estimate of 58.5 and well above its long-run average of 51.8. The PMI has remained above the 50.0 no-change mark for the past 56 months. The Press Release for the survey was resolutely upbeat. “The eurozone manufacturing sector continued to expand at a robust pace in February. Although rates of increase in output and new orders eased further from the highs reached before the turn of the year, the sector is still enjoying one of its best growth spells over the past 18 years… National PMI data also highlighted the broad-base of the upturn, with expansions seen in all of the countries covered. Growth was led by the Netherlands (survey record expansion), Germany and Austria. Although rates of increase eased in the latter two, and also in France, Italy and Ireland, growth was robust across the board. Spain and Greece both saw faster expansions, with Greece registering its best pace of improvement for 18 years.”

Markit’s one note of caution from the PMI survey was that, “There are signs, however, that growth could cool further in coming months. A slowdown in growth of new export order inflows to an 11-month low suggests that the appreciation of the euro may be starting to curb export sales. Job creation, while still among the highest seen in the twenty-year survey history, has meanwhile moderated as a result of the slower inflows of orders, adding to suspicions that the manufacturing growth peak is behind us.” The EUR opens in London this morning in the high USD1.22’s with GBP/EUR in the low 1.12’s.

The Aussie Dollar has spent most of this week moving lower against the USD, although from Monday’s opening levels in Sydney it is up against the GBP. The combination of lower stock markets, much lower gold prices and a pick-up in volatility is rarely good for the AUD and once it fell through technical support in the 0.7780-90 area yesterday, it tumbled to a low of 0.7715; a fresh low for 2018 and the weakest since December 27th. Overnight, AUD/USD has managed to rally around half a cent to 0.7770 but elsewhere is mixed: down against the NZD but up against the GBP.

According to a report in The Australian this morning, Trade Minister Steve Ciobo has warned sweeping United States’ tariffs on steel and aluminium imports will cost Australian jobs and potentially set off retaliatory trade bans that could push the global economy into recession. The paper quotes Mr Ciobo saying he had already reached out to US Commerce Secretary Wilbur Ross and Australian Ambassador Joe Hockey to determine whether Australian companies would be exempt from the tariffs, which the US previously indicated would be the case. “The imposition of a tariff like this will do nothing other than distort trade and ultimately we believe will lead to a loss of jobs.” Australian steel exports to the US are worth roughly $US210m a year while aluminium exports are worth around $US213m a year.

The next two main events for the Aussie Dollar will be Tuesday’s RBA Board meeting and then Wednesday’s Q4 GDP report. It would be one of the biggest surprises ever if the RBA changed interest rates and there’s no great need for any change of signaling from the Central Bank on future policy intentions. Not all the ‘partial data’ are yet in for GDP but early estimates indicate a number around 0.6-0.7% q/q for an annual rate of growth around 2.6-2.7%. The Australian Dollar opens this morning in the mid-USD77’s with GBP/AUD at 1.77. .

The Canadian Dollar continues to struggle. On Wednesday afternoon USD/CAD moved up on to a 1.28 ‘big figure’ for the first time since December 20th and yesterday after President Trump’s tariffs announcement (which was seen as a negative for progress on NAFTA) it extended these gains to 1.2890; a fresh 10-week high (CAD low) before settling overnight in Asia in the mid-1.28’s.

President Trump last night announced the US will impose global tariffs on steel and aluminum imports; the proposed levels are 25% on steel imports and 10% on aluminum imports and the rates will apply to all source countries. The president said he would formally institute these tariffs next week and has promised that they would be in effect “for a long period of time”. The White House said the tariffs are needed to "protect American-based businesses and workers from cheap foreign steel" that it claims is unfairly subsidized. “We are going to continue to protect American workers,” said White House spokeswoman Sara Sanders. The top steel exporters to the US in 2017 were Canada, followed by Brazil, South Korea, Mexico and Russia, then Turkey, Japan, Taiwan and Germany. China was in 11th place.

Canada’s Foreign Minister Chrystia Freeland said last night that Canada buys more than half of American steel, resulting in a $2 billion surplus for the US. She also said it’s “entirely inappropriate” for the U.S. to consider the country a threat to national security. “We will always stand up for Canadian workers and Canadian businesses... Should restrictions be imposed on Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interests and workers.” As a seventh round of NAFTA talks continues in Mexico City, an escalation of a trade and tariffs war makes for a very difficult backdrop. The Canadian Dollar opens in Europe this morning with USD/CAD in the mid-1.28’s and GBP/CAD in the high-1.76’s.

The NZD continues to be the most volatile of all the six major currencies we follow closely here and after twice this week finishing bottom of our one-day performance table, on Thursday it was back in top spot. The all-important AUD/NZD cross continued its drop from Wednesday’s 1.0825 high and late in the North American afternoon traded back on to a 1.06 handle. This helped push NZD/USD from its low in Sydney around 0.7190 back up to the mid-72’s and with around 12 hours left until the close of business, the NZD is, for the moment, once again the top performer on the day.

The ANZ Roy Morgan consumer confidence index rose to 127.7 in February from 126.9 in January. The current conditions index fell 4 points to 127.3 while the future conditions index gained 4 points to 128. Of the survey's 1,000 respondents, a net 21% saw good economic times in the coming 12 months, unchanged from January. The five-year outlook rose seven points, with a net 29% seeing good times ahead. A net 15% of respondents felt they and their families were better off financially than this time last year, from net 16% in January, and a net 34% expect to be better off financially a year from now, up from 29%.

In a very upbeat Press Release, the analysts at ANZ said, “Consumer confidence is at robust levels. We suspect one has to look no further than the tight labour market to explain why… The outlook for household incomes is good, with both the record-high terms of trade and slightly higher wage growth set to support. With the housing market seemingly having found a floor, downside risks have receded. The gap that opened up last month between responses to the current-situation and forward-looking questions closed in February. Strong commodity prices are boosting exporter incomes, and the strong labour market and government policy are supporting household incomes." The Kiwi Dollar opens in London in the mid-USD 72’s with GBP/NZD at 1.89. .