The pound finishes January on a high after a wobbly week. The Bank of England’s interest rate decision was for many investors, too close to call. Sterling was volatile and traded softer in the run up to the decision. It gained on the euro and US dollar, however, following the decision on January 30th to leave interest rates unchanged at 0.75%. Voting 7-2 in favour of holding rates, Mark Carney’s final meeting before he leaves the central bank saw policymakers take stock of what they saw as an improving picture for the UK economy. This measured a number of higher-than expected positive data releases following Prime Minister Boris Johnson’s winter election victory, providing some certainty to the political landscape. However, the Bank of England has also warned that any Brexit related uncertainty could potentially harm the UK’s future prospects for the year.
The UK leaves the European Union tonight, after 47 years as a member. While PM Boris Johnson says Brexit is “a new dawn” in his video message released later tonight, there will be little change immediately, as the UK enters the transition period of departure.
In Europe, while the German manufacturing PMI came in within the contraction zone at 45.2, it was half a point above forecast and the services PMI came in at a five-month high of 54.2. Across the euro zone, the composite PMI inched into the growth zone at 50.9. Business confidence in Germany suggests a “more pessimistic outlook for the coming months” according to the ISO business climate index but there was better news on consumer confidence. Increases were seen in France, Germany and Italy, which also saw a rise in business confidence. Confidence measures were announced before the GDP figures, which saw a surprise contraction by 0.1% quarter-on-quarter of French GDP in the fourth quarter, according to figures from INSEE. This was lower than the forecast 0.2% and a fall from the third quarter results of 0.3% growth.
There was better news in Spain, which showed GDP was up 0.5% quarter-on-quarter and 1.8% year-on-year for Q4 and increases were also seen in Belgium and Austria. Investors will be looking for a continued positive trend to support any gains for the euro.
The US dollar looks set to be finishing strong against the euro and the Loonie, but has retreated against sterling and the Japanese yen. Concerns surrounding the spread of the coronavirus are affecting major markets, with the outbreak of sufficient enormity to warrant consideration by the Federal Reserve in its monetary policy decision this week. The US central bank left its benchmark interest rate unchanged, with Fed chairman Jay Powell stating there would “clearly be implication at least in the near term” for growth in China and elsewhere. After an initial sell-off Thursday morning, the DOW rallied to finish 125 points higher, with DOW Futures this morning showing the US equity markets opening roughly 70 points lower.
The Loonie sunk to a seven-week low against the greenback early this week after becoming weighed down by sluggish oil prices. Investors have been dropping commodities since the coronavirus outbreak. The Canadian dollar is still on a downward trend from the Bank of Canada’s surprisingly dovish stance, after it left its interest rates at 1.75%. While this was expected, the BoC did say a rate cut in the near future was possible if domestic growth kept slowing.
Celebrations for Australia Day kicked off the week, however there wasn’t much cause for optimism as far as the Australian dollar was concerned by the end of it. Steady data helped keep the Aussie afloat as the week began, as the NAB’s monthly business survey offered “further evidence that activity stabilised in Q4”, while consumer prices rose by 0.7% in the fourth quarter of 2019. With headline inflation for 2019 reaching 1.8%, the likelihood of a rate cut by the Reserve Bank of Australia has sunk as low as 10% in the eyes of investors.
However, mixed results as the week went on and increased fears from investors regarding the coronavirus did little to help the Aussie defend itself against positive data out of the UK and US. Private Sector Credit was positive at 2.3%, however Friday’s PPI prices remained in line with downbeat market expectations. This saw AUD end up behind the pound, euro, yuan, US dollar, Canadian dollar and Swedish krona as it continued its poor start to 2020.
The kiwi dropped 2% in the week of more continued virus worries. New Zealand’s economic growth like many countries in Asia and Australasia, is pegged to China’s success more-or-less. While China’s National Bureau of Statistics PMI came in at 50, and was in line of expectations, this data doesn’t reflect the impact of the coronavirus as it was taken before the outbreak. The kiwi improved slightly but lost ground against GBP after the BoE rate decision. The New Zealand dollar finds itself finishing at the back of the pack, behind even the Aussie.