Home Daily Commentaries After a strong Monday, GBP slips a little on EU advisor comments. EUR recovers despite Italian elections. USD steady after big stock market rally.

After a strong Monday, GBP slips a little on EU advisor comments. EUR recovers despite Italian elections. USD steady after big stock market rally.

Daily Currency Update

The British Pound had a good day on Monday, as an apparent truce between the warring factions of the Conservative party and some decent economic data brought a recently-rare combination of good news. As recently as last Thursday, GBP/USD hit a low point 1.3720; the lowest since January 12th (the day after the ECB first spoke about changing forward guidance). The pair rallied on Friday as the USD came under pressure and the GBP extended its gains on Monday to a five-day high around 1.3870. By close of business in New York, the GBP was at the top of our one-day performance table with gains of around three-tenths of a percent against most major currencies and more than one per cent against the CAD. Overnight, however, it has slipped back a little and stands in the USD 1.38’s.

Monday’s UK economic data were generally better than expected. The service sector PMI registered 54.5 in February, up from 53.0 in January, to signal the strongest rate of output growth for four months. Higher levels of business activity were attributed to the resilient economic backdrop and an associated upturn in new work. Markit noted that, “UK service providers experienced a modest rebound in business activity growth during February, supported by the fastest rise in new work since May 2017. The latest survey also pointed to stronger job creation across the service economy, with payroll numbers rising to the greatest extent for five months as firms sought to boost operating capacity in response to improved order books.”

On Theresa May’s speech, we said yesterday that, “the reaction of the EU will be more important than the routine criticisms from Opposition parties in Westminster.” The Guardian newspaper leads with the story that Stefaan de Rynck, the main adviser to the EU’s chief Brexit negotiator, Michel Barnier, stressed that the rules of the single market required far more than her chief proposal – a mutual recognition of standards. In his speech, at a special LSE lecture in London last night, de Rynck said, “The EU has moved away in the wake of the financial crisis from mutual recognition of national standards to a centralised approach with a single EU rule book and common enforcement structures and single supervisory structures.” He also claimed EU businesses, faced by a choice, “are more concerned with maintaining the integrity of the EU single market than any loss of access to British markets.” Let’s see if the recent rally in the pound can shrug off these comments…

Key Movers

The US Dollar had a very mixed day on Monday: down against a buoyant GBP, unchanged against the EUR but quite a bit higher against the friendless CAD. The day began with equity index futures extending Friday’s losses – something with often lends support to the USD – but in the New York afternoon, stock markets caught a bid and the DJIA moved from being almost 200 points down to 300 points up. The USD index against a basket of major currencies traded in a relatively narrow range from 89.55 to 89.80 and finished pretty much around the mid-point of this at 89.65. Overnight in Asia, it has eased back a little, largely due to a somewhat higher EUR/USD rate.

February’s ISM non-manufacturing index slipped very slightly from 59.9 to a still very strong 59.5; the 97th consecutive month of expansion in the service sector. Business activity rose 3 points to 62.8, whilst new orders rose 2.1 to 64.8 but employment fell 6.6 from an exceptionally high reading of 61.6 in January to 55.0 and prices paid fell 0.9 to 61.0. According to the ISM, 16 non-manufacturing industries reported growth and the majority of respondents continue to be positive about business conditions and the economy.

Although the Atlanta Fed updates its GDP forecast after the ISM manufacturing report, it doesn’t do so after the service sector index is published. Its next update will come on Wednesday after the international trade numbers are released. Currently, its forecast for Q1 growth is an annualized pace of 3.5%. Tuesday brings factory orders and durable goods numbers whilst New York Fed Chief Bill Dudley – who last week said that four rate hikes in 2018 would be ‘gradual’ - is scheduled to make a speech on the economy. All eyes elsewhere will be on the POTUS’ Twitter feed; a single tweet from Mr. Trump could easily move stocks and the US Dollar by one per cent in a matter of moments. The USD index opens this morning in Europe around 89.55.

By last Thursday morning, EUR/USD had fallen to 1.2160; its lowest since mid-January. It began to rally as soon as President Trump announced his trade tariffs and having gained a full cent by the close of business in New York, it extended gains on Friday to a high of 1.2330. Yesterday, the EUR initially rallied on news that Angela Merkel could form a coalition government but subsequently gave back some of its gains as investors attempted to digest the results of the Italian general election. Overnight in Asia, the EUR has broken above Monday’s high to reach a best level around 1.2360; its highest in 2-weeks.

After Sunday’s Italian election, the two populist parties which emerged triumphant have both claimed the right to form the next government. According to The Times, “Matteo Salvini, head of the anti-migrant League party, said yesterday that he had “the right and the duty” to lead a government after he took 17 per cent of the vote on Sunday, making him the senior partner in his right-wing coalition with Silvio Berlusconi’s Forza Italia. With a combined 37 per cent of the vote, their bloc is the largest in the new parliament. Minutes after Mr Salvini’s victorious press conference, however, Luigi Di Maio, head of the anti-establishment Five Star Movement, declared that his party, which came first with 32.6 per cent of the vote, was “the absolute winner” and should dictate the pace. “We feel we have the responsibility to create a government… We are sure the president [of Italy] will give us this opportunity.”

The combined electoral share of the two rival parties didn’t quite form a mathematical majority but by gaining 49% of the total votes cast, it was a result which surprised all the political experts in the country. The Five Star Movement did best in the south where unemployment is highest and it had promised to pay a minimum €780 minimum wage to the jobless. The Northern League did best in the North (the clue is in the name!) where it received more votes than its presumed coalition party Forza Italia led by Silvio Berlusconi. The League and 5SM have both ruled out any power-sharing agreement so it now falls to the President to choose which one he will call to see if they can form a formal Coalition government. Failing that, new elections will have to be called. The euro opens in London this morning in the mid-USD1.23’s with GBP/EUR in the low 1.12’s.

Monday brought a fairly quiet start to the week for the Aussie Dollar, stuck between better than expected incoming economic data and recovering stock markets on the one hand, and some nervousness around the RBA’s messaging and Q4 GDP figures on the other. AUD/USD spent almost the whole day in a relatively narrow band from 0.7725 to 0.7765, with both the VIX index of volatility and the gold price down a little from Friday’s closing levels but overnight in Asia has popped up to a high around 0.7790; its best level since last Wednesday.

To no-one’s great surprise, the RBA decided to leave the cash rate unchanged at 1.50 per cent.; the 19th consecutive month of unchanged rates. Its Statement said, “The Bank's central forecast is for the Australian economy to grow faster in 2018 than it did in 2017. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Further growth in exports is expected after temporary weakness at the end of 2017. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.” The one thing that caught the attention of currency markets was the line that, “Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. Consistent with this, the rate of wage growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.”

It’s a bit of a stretch to jump from “wage growth appears to have troughed” to a forecast either that wages will go up or an observation that they have indeed already risen. But, foreign exchange markets often get way ahead of themselves and this merest hint of a bit more optimism on wages was the main reason the AUD moved higher. In other data overnight, January retail sales rose a meagre 0.1%, whilst the Q4 balance of payments data showed exports -1.8% and imports +0.5% which will subtract around 0.5% from tomorrow’s GDP data. Forecasts for this 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 1.78.


The Canadian Dollar had another poor week. USD/CAD opened last Monday morning in the mid-1.26’s and moved relentlessly higher to a best level on Friday around 1.2910; its first time on a 1.29 ‘big figure’ since November 30th and the highest level since mid-July. AUD/CAD, meantime, on Friday hit parity for the first time since August 18th and is up 3½ cents since its early-December low, whilst GBP/CAD at 1.78 is the highest since late-June.

The announcement of US tariffs hits the Canadian Dollar in two ways. First, and directly, Canada is the world’s number one exporter of steel to the United States, followed by Brazil, South Korea, Mexico and Russia. Canada’s Foreign Minister Chrystia Freeland said it’s “entirely inappropriate” for the US 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.” Second, as a seventh round of NAFTA talks is underway in Mexico City, an escalation of a trade and tariffs war makes for a very difficult backdrop, throwing doubt on the whole process.

The week ahead could be quite busy for the Canadian Dollar, not just in terms of economic data and trade news, but also on Wednesday the Bank of Canada policy meeting. The BoC is unanimously expected to leave official rates unchanged at 1.25% after the 25bp hike in January and the accompanying statement will be closely read for what the Central Bank has to say about trade and the economy. Ahead of that on Tuesday is the PMI survey and on Wednesday morning the housing starts and labour productivity data. On Friday, the Canadian labour market report will be released at the same time as the US employment numbers. The Canadian Dollar opens in Europe this morning with USD/CAD in the low-1.29’s and GBP/CAD at 1.78.

For once, the New Zealand Dollar had an average, middle of the pack day on Monday; little changed against its Aussie cousin around 1.0740 and on the same 72 cents ‘big figure’ throughout the day against the US Dollar. For many businesses and traders, this will have been a welcome period of calm after the seemingly random daily movements over the past couple of weeks. Its biggest change came against the GBP which was way out at the top of the leaderboard, with GBP/NZD rising a full cent to a 5-day high of 1.9160.

Away from the economic stuff, New Zealand’s National Institute of Water and Atmospheric Research (NIWA) reports that the Summer of 2018-18 was the hottest on record. Their cousins across the Tasman Sea in Australia may snigger, but the nationwide average temperature was 18.8 degrees Celsius, 0.3C above the previous 1934-35 record of 18.5C, and a significant 2.1C above the 1981-2010 averages. The hot summer was characterised by mean sea level pressures being higher than normal, bringing more northerly and northeasterly winds than normal - consistent with La Niña conditions. For the capital Wellington, there were 17 days when the temperature exceeded 25 degrees, whilst Alexandra reached 38.7°C on 30 January, the country’s hottest January temperature in 39 years.

Starting tomorrow, there are three of the ‘partial data’ which feed in to the calculation of the GDP numbers which are out next week. On Wednesday it is Building Work Put in Place and Wholesale Trade whilst Thursday is the quarterly Survey of Manufacturing. For the moment, early estimates of the GDP number are for growth around 0.4-0.6% in the December quarter. The Kiwi Dollar opens in London in the mid-USD 72’s with GBP/NZD at 1.91.


Expected Ranges

  • GBP/USD: 1.3720 - 1.3910 ▼
  • GBP/EUR: 1.1175 - 1.1270 ▼
  • GBP/AUD: 1.7685 - 1.7870 ▼
  • GBP/CAD: 1.7795 - 1.8000 ▼
  • GBP/NZD: 1.9025 - 1.9250 ▼