Reality Bites for Sterling

Clouds on the horizon?

Against an overall stronger dollar, the pound suffered its biggest fall in almost two months yesterday. Domestic economic conditions are starting to cause concern, which will serve to silence those who recently called for a tightening of monetary policy.

Sterling broke the support it had seen at 1.2320, trading below 1.2300 for the first time since early January. It recovered later in the day to close close to what has become an important level at 1.2320.

The Purchasing Managers Index of economic activity fell, as forecast, following the huge rise seen in input prices from a year before. Consumer activity also dropped (start of a trend?) with consumer credit slowing for the second month, after posting seven months of continuous growth.

Sterling also suffered against the Euro, trading at 0.8578 just failing to break resistance seen at around 0.8585/90.

There were also two political issues which affected the pound yesterday; the Scottish independence issue and a defeat for the Government on an amendment to the Brexit Bill in the House of Lords. But it will be the economic problems, real rather than perceived, that drives the pound back towards the 1.2000 level.

One small ray of light was an agreement reached by Irish Prime Minister in Brussels meaning that the border between Ireland and Northern Ireland would remain “as open as possible” following Brexit. This at least showed a little welcome flexibility on the part of the EU.

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U.S. economic picture drives dollar despite Trump

As with the previous day, FOMC members are starting to read from the same page when it comes to the need for a tightening of monetary policy in the United States. The dollar index (the measure of USD strength against a basket of six major currencies) rose yesterday to its highest level since early January. It touched 102.00 before settling back to close at 101.95.

Next week’s employment report is taking on greater significance and it will take a major surprise to the downside to deflect an interest rate hike in a couple of weeks. Whilst the employment data can be erratic, if the figure shows growth in jobs at close to trend (+180k) then a rate hike will be as good as done.

The pace of rate hikes is causing concern for equity market investors who have seen record closes for the Dow Jones Index since the start of the year. Should the FOMC be seen to be getting “too far ahead of the curve” a sustained bout of profit taking could be seen, which will take the gloss off the U.S. economy.

Against individual currencies, the dollar rose to 114.20 against the JPY (a two week high) and the Euro fell to 1.0525 (a fall of 0.2%). Largely though, the dollar is bathing in the glow of an economy which is re-emerging as a world leader, despite a President intent on talking a good game without yet delivering. His condemnation of Obamacare before having an alternative in place is the perfect example of a man continually shooting from the hip. He has been successful in business taking risks but will a similar method serve him so well in Government?

Elsewhere, Chinese manufacturing remained steady in February which gave a boost to the Australian dollar, as the main wholesaler of Chinese raw materials. The Canadian Central Bank held interest rates unchanged which led to a fall in the Canadian dollar to a six week low at 1.3350.