The euro continues to trade higher against both the US dollar and the British pound, despite the obvious weakness of the Eurozone economy and the very accommodative nature of the European Central Bank’s ongoing stimulus measures, which are in distinct contrast to the action of the Bank of England and the US Federal Reserve.
US interest rates will no doubt rise again at some point this year as qualified by this week’s release of the most recent FOMC minutes. The Federal Open market Committee did discuss the possibility of raising US interest rates again in April, however for the moment, with contradictory feeling running high amongst the USA Federal Reserve voting members, it seems that FED chairwoman Janet Yellen’s recent rhetoric has reaffirmed that US policy will see rates tweaked just two more time this year at most, rather than four times that were partially accounted for by the markets. Diverging interest rate policy should over time offer good reason to favour the US dollar over the Euro, but for now this is not necessarily the case.
A slightly slower rate hike trajectory has seen the US dollar sold off, helping the euro to climb form a low over the week of 1.1325 to touch a high of 1.1455 – a level last seen very briefly back in October 2015.
Europe’s unemployment rate remains persistently high, with the February level reported at 10.3% down from 10.4% one month earlier. To try to spin this as a positive you could refer to the fact that as of February 2015 the level actually stood at 11.2% unemployed, and that the current rate did represent the lowest rate reported since August 2011.
European growth prospects remain very subdued during the first quarter of 2016. Overall European activity levels, as measured by the Purchasing Managers Index, saw the Eurozone Composite output index dip to a reading of 53.1. Whilst anything above 50 represents growth the outcome was the weakest registered since the fourth quarter of 2014. Ireland and Spain were showing activity levels at 2 month highs; Germany was running at an 8 month low; Italy at a 12 month low.
From the UK we have seen further deep declines for sterling. The Pound slumped to the lowest level since June 2014 against the Euro and close to a 30 month low against a basket of currencies. The market remains dominated by fear of a possible UK exit from the European Union after the referendum on the 23rd June. The outcome of the vote is too close to call, leaving investors less likely to invest in the UK whilst the outcome remains so uncertain.
The pound certainly did not benefit from the furore surrounding Prime Minister David Cameron’s family ties to an offshore tax haven trust, following the leaking of the ‘Panama papers’ which are implicating the global rich of aggressive tax avoidance schemes.
The pound slid over the course of the week having started the week at highs of around 1.2560 only to fall to as low as 1.2350.
UK construction delivered a downbeat assessment of activity with new order growth dropping to an 11 month low. The London property market is clearly seeing some wobbles now as soon to be introduced revisions to stamp duty put off many overseas investors of buying into the previously booming residential market. Developers are now heavily discounting property to keep interest buoyant.
Clearly the global slowdown, Brexit, deflation concerns are taking a toll of investment and activity levels. Sterling ends the week below 1.24 as UK manufacturing data for February shrank by 0.2% and that the overall first quarter performance incorporating industrial production now signals sluggish growth at best.
Next week sees inflation results for the UK and Eurozone, plus the Bank of England’s latest interest rate announcement. Will the sterling decline be checked; possibly considering it has fallen so far so very quickly, although there remains little on the horizon to offer a major boost.
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