Post date: 23/03/2018 18:00
This week has been the best week of the year for The Sterling, seeing an increase in the Pound against all major currencies and a new long term high. There are many factors behind this. Each day has yielded good news on either the U.K economic or political front. This good news has been as follows:
– On Monday news struck that the EU and U.K may have agreed a transition period for Brexit.
– Tuesday we saw inflation data which showed a slight drop off in core inflation figures. Subsequently, this had been a concern for the Bank of England as inflation was not only well above their 2% target but also well above average earnings figures.
– Unemployment levels for the U.K had shown an improvement, coming down to 4.3% which is good for the U.K. In addition, most average earnings have risen closer to inflation.
– Yesterday, The Bank of England voted 7-2 in favour of keeping interest rates on hold. Consequently, The Sterling witnessed an instant boost from this news as previously the MPC members had voted 9-0 in favour of no rate changes.
Not much happening this week with the Eurozone, apart from Brexit, which is mainly affecting the pound. However, the Euro managed to reverse its recent losses against the US dollar. The euro data calendar has been quiet this week but was more eventful yesterday morning with the release of Markit Purchasing Managers Indices for a number of Eurozone nations. The data showed March Flash Services PMI at 55.0 and Flash Manufacturing PMI at 56.6. These were both below expectations and lower than the previous month, pointing towards a downturn in Eurozone growth in Q1 2018.
As expected, The Federal Reserve voted anonymously to raise interest rates on Wednesday for the first time in 2018. This vote coincided with Jerome Powell’s first meeting as the new Chair. With fed fund futures showing that the market was fully pricing in a hike prior to the meeting, investors were instead far more concerned with the release of the FOMC’s latest interest rate projections.
Despite the hawkish assessment from the Fed, the US Dollar slipped by around half a percent against both the Euro and the Pound off of the back of the announcement. The market reaction suggests that investors’ expectations were very high going into the meeting and were much more hawkish than we had anticipated.
Both the statement and economic projections confirm that we’re likely to see a minimum of three interest rate hikes from the Fed in 2018, with a strong possibility of a fourth should the inflation outlook improve.