Weekly Brief

Steady success for sterling

7 minute read


The UK economic data and the pound headed in opposite directions. Although last Friday’s figures for fourth quarter growth were better than expected, with GDP expanding by a quarterly 1%, the same could not be said of production or December’s trade deficit. Inflation was higher than expected in January, with the headline CPI rate edging higher from 0.6% to 0.7%, not enough to alter expectations for a protracted period of near-zero UK interest rates. This Friday’s retail sales data for January were always going to look horrid, given the mandated closure of hospitality venues and unnecessary shops. With that in mind, investors only briefly marked sterling down when the predicted 2.5% monthly decline materialised as an actual 8.2% plunge.

None of that mattered to the pound. Although it was only on Thursday that sterling was the major currency leader, it was among the front-runners every day and the clear leader for the week as a whole, with the second-placed AUD 0.8% behind. Sterling strengthened by an average of 1.3%, with GBP/USD reaching $1.40 for the first time since April 2018.



An unusually low-profile week generated few headlines, economic or political, from the Eurozone. The confirmation of Mario Draghi as Italy’s Prime Minister might have had more impact had it not been so widely expected for so long. Investors do still see significant potential upside for Italy with Sig. Draghi at the helm, and his presence has already pushed down government borrowing costs. But Italy is only a part of the Eurozone, and the other parts had little to say for themselves.

The same was true of the pan-Eurozone economic data, which were neither numerous nor illuminating. Industrial production and the balance of trade seldom have much impact on the euro because their important components are already known. Likewise with gross domestic product; the 0.6% shrinkage in Q420 was almost exactly in line with forecast. The only real interest came from ZEW’s survey of German and Eurozone institutional investors. It reported economic sentiment in Germany rising by more than nine points to 71, while in the Eurozone it went up by the same amount to 69.6. Although neither was a record high they were not a mile adrift, and both were well ahead of forecast. The EUR lost an average of 0.3% and gave up a cent and three quarters to the GBP.



The dollar was on average unchanged on the week, losing a cent and three quarters to sterling and picking up a third of a cent against the euro. Paradoxically, the relationship between the US economic data and the USD was almost the reverse of the UK/GBP situation: the American numbers were predominantly better than expected or higher on the month but only rarely did they help the currency.

The New York Fed’s Manufacturing Survey reported that “Firms remained optimistic that conditions would improve over the next six months”. Retail sales were up by 5.3% on the month in January and 7.4% higher than January last year. The 0.9% rise in industrial production was almost twice as big as expected. Producer prices were 1.7% higher on the year, again nearly double the predicted figure. The NAHB Housing Market Index, a measure of current and anticipated residential property construction, was a point higher at 84. Although six points short of November’s high, it was still well above pre-pandemic levels. The minutes of January’s Federal Open Market Committee meeting confirmed that the Fed intends to keep monetary policy relaxed for the foreseeable future. It will do so despite the FOMC seeing a “considerably stronger outlook for activity in 2021”.



The Loonie managed to keep its nose ahead of the US dollar, adding a seventh of a US cent over the course of the week. It fell by an average of 0.2% against the other majors and lost the best part of two cents to sterling. A net 3.5% rise in oil prices had minimal effect on the CAD, partly because the movement was jerky and inconsistent and also because the mid-week rise was technical in nature: the unusually harsh weather reduced US oil production by a temporary 40%.

Canadian inflation “rose at a faster pace in January (+1.0%) year over year than in December (+0.7%)”. The increase was not unexpected. ADP’s National Employment Report showed a loss of 231,200 jobs in January, 16 times as many as forecast. The Loonie flinched only briefly. House prices continued their rise, with Teranet’s composite index 9.6% higher on the year and Statistics Canada’s new housing price index up by 5.4%.



Although there was more red than green among the Australian economic data, the Aussie dollar had a fairly successful week, taking second place behind sterling. It strengthened by an average of 0.5%, adding a third of a US cent. The AUD lost a cent and a half to the GBP. The most intriguing Australian ecostat was new home sales for January. They were down by 69.4% on the month. There was a technical reason for the drop: sales in December had surged by 91.8% as buyers hurried to beat a 31 December deadline for the $25k Home Builder grant, now reduced to $25k.

Otherwise the data were fairly straightforward. The employment data were roughly in line with forecast. A swing from part-time to full-time employment and an increase of 30k Australian jobs did not thrill the Aussie but the numbers were decent enough. A 4.1% fall in retail sales was close to the preliminary estimate, and put sales 9.6% higher in December than the same month last year.



New Zealand produced its own seemingly outrageous statistic, for visitor arrivals. They fell by 98.9% between December 2019 and December 2020. In fact the number was wholly predictable, given New Zealand’s decision to close its borders in defence against the pandemic. There were a couple of more ordinary ecostats to calm the excitement. Business NZ’s performance of services index for January was softer on the month, down by 1.2 points and, at 47.9, in contraction for the third consecutive month. REINZ’s house price index was up by a monthly 1.3%. “The housing market value nationwide year-on-year has lifted 19.2%, up in Auckland by 17.7%, and increased outside Auckland by 20.4%.” Demand was apparently inflated by investors hurrying to buy before the introduction of more restrictive mortgage rules.

On average the NZD was all but unchanged against the majors. It was flat against the USD and lost two and a third cents to the GBP.


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