Manufacturing and Industrial output improve

Sterling remains close to its 2020 low, despite the release of encouraging economic data yesterday.

The preliminary release of Q4 2019 GDP had created a degree of concern amongst traders that the economy may contract. So, the fact that the economy neither grew nor contracted in Q4 came as something of a relief. When coupled with the more encouraging data for manufacturing and industrial output, the outlook for the economy remains marginally positive although the shadow of Brexit trade negotiations remains.

Industrial production continued in negative territory, contracting by 1.8% in December having fallen by 2.5% in November. Meanwhile manufacturing production which fell by 1.6% in November recovered to expand by 0.3% in December.

The outlook for the economy is clearly dependent upon the negotiations that will start next month between London and Brussels over a comprehensive trade agreement.

Now that the degree of bluster has fallen to acceptable levels, a degree of realism has set in.

It has become clear that the EU needs a deal to be agreed almost as much as the UK. The level of rhetoric has subsided, leaving the expectation of optimism setting in when the talks begin.

While the two major economies of western Europe scrape the bottom of the GDP barrel, U.S. GDP remains relatively strong.

The pound regained a little ground versus the dollar yesterday, reaching 1.2970 and closing at 1.2967 as the greenback entered a corrective phase.

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The dollar correction unlikely be deep

News from Chinese medical sources that the Coronavirus outbreak is likely to peak at its epicentre in Hunan Province within the next month precipitated an expected correction in the value of the dollar as risk appetite improved slightly.

With over 40K cases so far reported with the majority in China and close to 1,000 deaths the epidemic is far from under control and it depends just how many cases continue to be confirmed worldwide as to whether the outbreak can be considered under control.

Fed Chairman Jerome Powell in his semi-annual testimony to the Congress Financial Services Committee noted the seriousness of the outbreak, and how it could signal wider risks to the global economy. He did however confirm that he remains comfortable with the current level of short-term interest rates.

His comments drew a further tirade from President Trump who told Fox News that the U.S. should have a lower interest rate (he clearly isn’t concerned about inflation) and that he has been let down by Powell and that he (Powell) had done the wrong thing.

Powell commended the Chinese Government on taking strong action and doing plenty to support the economy

With inflation data due for release tomorrow, the Fed’s policy on short-term interest rates will be in focus and since, in all likelihood Powell has received an advance report it is unlikely that inflation will have grown too much

Yesterday, the dollar corrected as expected, falling to a low of 98.71, closing just one pip higher

Euro fall may slow while dollar corrects

As the financial markets come to terms with the paucity of options available to the ECB to stimulate the economy, pressure will grow on Christiane Lagarde to provide a conduit between Frankfurt and Brussels.

One of Ms Lagarde’s prime credentials for being given the Presidency is her ability to join parties together to create a harmonious agreement on some very tough topics. This relates to both her time as MD of the International Monetary Fund and stretches back to her time as French Minister of Finance and Economy.

The Eurozone faces increased pressure since the UK has left the fund even though the UK remained outside the single currency. It was becoming increasingly difficult to differentiate between those outside looking in and those on the inside looking out. Denmark remains on the outside and there are several potential joiners who appear reluctant to do so, the most prominent of which is Poland.

In the early days of the Eurozone, potential members were falling over themselves to join, but the attraction has gradually faded.

At the risk of repeating an oft muttered opinion, the Eurozone will continue to suffer until there is a workable and efficient Fiscal Union between the nations of the EU where taxes, social care and budgets are agreed centrally.

Yesterday, the euro benefitted from a correcting dollar, reaching a high of 1.0925, having traded down to 1.0891 early in the day.