Post date: 09/04/2018 09:00
After returning from the bank holiday on Tuesday, we expected a tough week for the GBP. The start of the UK financial year, 6 April, initiates the start of dividend payments to British shareholders in foreign companies. Alternatively, numerous other incoming capital from around the world also creates a demand for the Sterling effectively pushing up the value of the Pound.
Poor weather conditions throughout March also held back construction and retail sales. Over the next few days we watched out for the first data sets from March and examined the extent of the negative effects of the poor weather conditions. It then emerged that UK Manufacturing data is at a 1-year low, although the figure is still north of the average over the past 10-years, mostly owing to the weaker Pound. Yesterday we found out that the UK’s Construction industry slumped last month due to the heavy snow. This fall was much greater than the markets had predicted.
The Sterling appears to be holding onto its recent gains after the Brexit transitional deal arrangements. Despite a barrage of weak data, we expect to see the resolute Pound strengthen throughout the year. If we consider how much the Pound fell by after the Brexit vote it may be fair to say the Pound is still oversold, which is perhaps why weak data isn’t having a significant impact. Today there will be a release covering the UK's services sector which covers over 2/3’s of the UK economy. Despite increased sentiment surrounding the Pound, there will likely be a rate hike next month. We do predict that weak data in this sector will result in a weaker Pound.
The GBP/EUR rate started the week close to the highest levels for buying euros since the start of the year. However, it was predicted that the pound could come under pressure due to the upcoming Brexit negotiations. Analysts at Danske Bank have said that the main release last week was Euro area inflation. They expected headline inflation to arrive at 1.5% in March and a temporary rise in core inflation of 1.2% due to Easter effects. Despite the expected increase in March, we do not expect it to break above 1.3% in 2018 as underlying price pressure remains and as wage growth remains below its historical average. This data came out worse than expected which is why we saw a dip in the EUR.
We had a quiet start data wise from the US. The main talking point was around the fear of a full blown US-China trade war. This prompted traders to sell out of USD which is why we saw weakness. Things were not looking great in the US economy and the dollar continued to fall. However, the main culprit regarding the dollar's fall is the US President. Every day is followed by a new revelation, with the FBI allegations and the disclosure of classified data adversely affecting the Dollar.
Other major currencies are stable but also felt some pressure. This is however nothing compared to the pressure on the USD recently. It is said that if the US President continues with his behaviour the USD could weaken further over the next few months. In addition, the USD didn’t end the week on the best run with Non-farm payrolls also featuring worse than expected.