GDP Surprise Continues Sterling Rally

UK economy growing but Brexit fears remain

A surprisingly stronger preliminary GDP release for Q4 ‘17 gave further impetus to the pound’s recent rise on Friday. The UK economy grew by 0.5% in the three months to December. This was a better performance than analysts had predicted and produced a YoY figure of 1.5%. This also bettered analysts’ predictions but was down from Q3’s 1.7%.

The pound finished the week up by close to 2% versus a dollar whose direction remains confused. It reached 1.4287 before settling back to close at 1.4109 following President Trump’s closing speech at the Davos World Economic Forum in which he continued to allude to dollar strength.

Fears remain over a correction to recent Sterling strength, the catalyst for which could be the start of the next stage of Brexit talks. There is concern that the capitulation that was seen at the end of stage one of the talks will spill over onto stage two and the UK will remain part of the EU in all but name.

While that could seen as a successful outcome by some, it is threatening to tear apart the ruling Conservative Party,which could lead to another General Election. Talks on the transition period are due to start imminently with the trade negotiations at the end of March.

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Dollar’s roller coaster ride set to continue.

As the dust settles on the seeming disagreement between President Trump and his Treasury Secretary over the future strength (or otherwise) of the greenback, the debate will continue as to just what U.S. policy is likely to be. The dollar index fell to a low of 88.72 on Friday but closed just above 89.00.The comments of Treasury Secretary Mnuchin in which he said that the weaker dollar helped the U.S. were apparently taken out of context as was said by President Trump and confirmed by Mnuchin himself at a subsequent TV interview. Traders remain sceptical about the intent despite these “read my lips” comments.

The President has constantly berated those countries that have benefitted from the previous administration’s apparent largess towards the trade and has started to impose tariffs on certain imports. However, this is unlikely to be successful without a weakening of the dollar whether officials are prepared to say so or not.

This week will culminate in the release of the employment report with the underlying growth in wages being the most significant part of the report since it will provide some clue as to the future path of inflation. The headline is expected to be above 200k new jobs which is in line with the GDP data that was released on Friday and showed the economy grew at 2.4% in Q4.

Euro in reactive mode.

Following remarks from ECB President Mario Draghi that were a little more hawkish than traders had expected the Euro fell back into a reactive mode on Friday as the dollar took centre stage.The single currency reached a high of 1.2494, just short of the medium-term target of 1.2520 which was met on Thursday but has attracted profit taking. As the market has opened in Asia this morning, the Euro has fallen a little from its 1.2420 close on Friday to reach 1.2385.

It is possible that this week will see the market in reflective mood trying to decide on whether the comments from the ECB are sufficient for them to continue to buy or whether the prospect of the continued widening of the interest rate differential between the Eurozone and the U.S. warrants a deeper correction.

The FOMC will meet this week in New York but are unlikely to move on interest rates, particularly given that he hand-over between Janet Yellen and Jerome Powell will take place at this meeting.

Versus the pound, the Euro has recovered a little closing on Friday on the low of 1. 1388.The pound’s recent rally looks a little fragile now with Brexit talks looking and a move back to the 1.1200 area should not be discounted.

This week’s events of note

Data focus turns to the Eurozone. The the U.S. employment reprt at the end of the week.