Euro hovers near bottom of its range as Sterling sinks on Brexit jitters

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18 February 2019

thomasdodds

Weaker US economic data, in particular a shockingly negative retail sales print, failed to make any dent in risk sentiment, as stocks ended the week mostly up.

I
n this environment, the US Dollar performed well, as some of the best-performing emerging market currencies fell sharply. Trump’s declaration of a doubtful state of emergency at least removes the possibility of another Federal Government shutdown, and markets chose to focus on the positive. By contrast, ECB executive board member Benoit Coeuré told a New York audience that the central bank is becoming concerned with the economic slowdown and lack of inflationary pressures in the Eurozone, and suggested that another round of long-term loans to banks was being considered.

This week, the Eurozone flash PMI of business activity in manufacturing is looming. We expect a decent rebound from recent low levels. However, any further disappointment would lead us to revise our view that the Eurozone slowdown is temporary and would have an impact on our EUR/USD forecasts.

Major currencies in detail

GBP

No news has clearly become bad news for Sterling over the past few weeks. The absence of progress in the Brexit negotiations, and the sense that the EU is quite ready to call any bluff on the UK’s side, added to the gloom on the Pound, which again was the worst performer among G10 currencies.

As the clock ticks down to the March 29th deadline, the most we expect from this week is a firming up of the date for the second Parliament vote on the withdrawal agreement – expected to take place before the end of the month.

EUR

Last week saw more weakness out of the Eurozone. There was another downward surprise in industrial production during December, while overall GDP growth for the Eurozone in the last quarter of 2018 was up an anaemic 0.8% in annualised terms, or 0.2% quarter-on-quarter (Figure 1).

Figure 1: Eurozone GDP Growth Rate (2011 – 2018)

This week we look forward to some clarity from the manufacturing index of business activity in February out on Thursday. This is perhaps the most advanced indicator of the state of the Eurozone economy. Any failure to rebound from January’s barely-expanding levels would be a serious disappointment.

USD

Economic news out of the US turned more mixed last week. Strong core inflation data was balanced out by a shocking negative surprise in the retail sales number for December, which was down 1.2% for the month alone. Given the traditional volatility in this figure and the disruptions to the data collection process that the Government shutdown caused, we are going to wait at least until next month’s number is out before drawing any conclusions.

Most other indicators in the US are consistent with steady albeit moderate growth, and the Federal Reserve turnabout in rates has eased financial conditions. We continue to see a backdrop of moderate growth combined with low rates in the US that should be quite supportive for emerging market currencies.