First Signs of Consumer Slowdown?

February 1st: Highlights

• Sterling slips then recovers poise
• Trump criticizes “undervalued” Euro
• U.S Manufacturing data due for release

It has been an unwritten rule in the U.S. that the administration avoids talking about the dollar. This is another rule that Trump has decided to ignore. Yesterday both the President and his senior trade advisor criticised other countries “playing the devaluation game”.

Sterling on the market rollercoaster

The pound had a fairly eventful day before concluding its best January performance in six years. It is also set to be the pound’s first positive start to the year since 2012.

Consumer credit data for December, revealed signs of a slowdown in borrowing for the first time since the Brexit referendum, which drove GBP down to the day-low of 1.2412 against a stronger USD. Any decline in consumer performance is likely to hit the currency hard, as this is the one sector of the economy that has over performed and produced consistent growth.

Tomorrow’s Quarterly Inflation Report carries risk of another blow to the consumer as it is forecast to show inflation on the rise, which could stifle the desire to spend.

House price data for January (released later today) is expected to be largely unchanged on December with the annual growth rate slipping to 4.2% (from 4.5%). This will provide some counterbalance to the imported inflation from the pound’s fall and could soften the stance of the Bank of England going forward.

Later in the session, Sterling recovered to a high of 1.2575 against a falling dollar, but it failed to make much ground against the Euro and the safe have currencies (JPY/CHF).

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Trump weighs into trade debate.

President Trump and his Senior Trade Advisor Peter Navarro both went onto the attack yesterday criticizing America’s major trading partners for benefitting from weaker currencies that allow them to export more.

The U.S. has long had a “strong dollar policy” which is not a lot more than bravado, with successive administrations believing that a strong dollar and a strong country (by any measure) went hand in hand.

Mr Trump accused Germany of “using a grossly undervalued Euro to gain advantage over the United States and its own European Union partners.” Germany could survive a stronger currency more than its Eurozone partners as it has a more balanced export profile selling both inside and outside the EU. However a stronger Euro, created by a weaker dollar, could have major consequences for a number of the countries in the Eurozone.

A case in point is Italy. Of the “major” Eurozone nations, they are still in crisis. Their banking system is struggling, weighed down by a mountain of bad loans. But the fall in the Euro from the 1.40’s to below 1.10 against the dollar has enabled them to export outside the currency bloc and help fend off recession. Any major appreciation in the value of the currency could spell disaster.

The Dollar index (a measure of the strength of the dollar against a basket of six major currencies) fell by just over 1% to its lowest level since early November, following Trump’s comments. It subsequently recovered in Asian trade as the interest rate differential provided support.

Today’s release of manufacturing data in the United States gives a major indication of the strength of the manufacturing sector. Any reading over 50 signals expansion in the sector and since hitting a low of 32 at the height of the financial crisis, US manufacturing recovered to a high of 61.3 in March 2011. Since then, the sector has remained fairly constant around 55.