Last week was one to forget for the pound to US dollar rate. The pair began Monday morning above the 1.31 level before nosediving to 1.28 by Friday afternoon, as Brexit concerns intensified. Even an upbeat survey on Friday, which revealed UK retailers experienced their highest sales levels in six years last month, couldn’t raise its spirits.
Boris Johnson isn’t just struggling to convince the public that he can avoid a no-deal Brexit at the end of the year – a BMG poll suggests that just 40% of people believe he will strike a free trade deal with the EU by his self-imposed 31 December deadline – investors in the pound also seem unsure. The resulting market uncertainty caused the GBP vs USD rate to tumble for three consecutive days, before closing out the week at its lowest level since late November.
Pound weakness was compounded by dollar strength last week. Confidence in the global economic outlook continued to be dampened by the coronavirus outbreak, raising the appeal of the safe-haven dollar throughout last week. There have been more than 40,000 cases of the virus globally, mostly in China. The total number of deaths in China is now 908. As a result, S&P lowered its 2020 growth forecast for China to 5% from 5.7%, based on an assumption the virus is contained by March.
The USD was given a further boost on Friday by the latest non-farm payrolls figure, which surged to 225,000 for the month, well above forecasts. According to the US Bureau of Labour Statistics unseasonably mild January helped to drive the US jobs market forward. The jobs report also revealed that the unemployment rate rose to 3.6%. This wasn’t all doom and gloom, however, as the labour force participation rate increased to 63.4%, equalling its highest level since June 2013. While average hourly earnings rose 3.1% over a year ago to $28.44, outstripping estimates. Whilst it is not anticipated that the FOMC will be making any adjustments to interest rates any time soon, it does indicate that the recent cuts are having positive effects.
It is a fairly quiet day today with only Federal Reserve Governor Michelle Bowman. She is due to deliver a speech titled "Empowering Community Banks". The market will keep a close eye on her rhetoric for any clues on future policy action.
The UK GDP is set for release following the recent hold in interest rates on a near 50/50 call. The first reading for Q4 is expected to post a flat reading, but given some of the disappointing data earlier in the month, there is some scope for a negative reading. This could play a part in the interest rate decision in March. In addition, BoE Carney is due to testify before the House of Lords Economic Affairs Committee, however he is due to step down next month.
The headline event will be FOMC’s testimony to the House of Representatives. FOMC Powell starts his two-day testimony in Washington. It is likely that he will reiterate that the economy is in a positive place. The market will be keeping a close eye on his rhetoric for clues on future policy action.
It also worth noting that New Hampshire primary will be taking place with Democratic candidates battling it out to face Donald Trump in the November Presidential election.
The headline event will be FOMC Powell’s second day of testimony in Washington, with Powell testifying before the Senate. The market will watch for any deviation from the previous day’s speech.
There are some key economic releases from Germany which will have a large impact on the Eurozone readings. German inflation and growth are set for release. It has been forecasted that German growth will contract by 0.1%.
Focus will remain on US data as headline CPI inflation hits the wires. Inflation is expected to post a higher reading and rise to 2.5% from 2.3%. Higher inflation will highlight that growth in the economy is sustainable given the strong employment data.
Closing the week, we have further economic readings from the US. The US retail sales and University of Michigan consumer confidence will be monitored for improvement following last week’s positive labour data.