GBP/USD Breaches $1.39 on Brexit Optimism as US Government Shuts Down
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GBP/USD Breaches $1.39 on Brexit Optimism as US Government Shuts Down

22 January 2018 by FC Exchange

Currency specialists FC Exchange offer some key information on factors that might impact your exchange rate this week.

GBP – Brexit optimism boosts sterling

Last week

– Last week UK inflation softened from 3.1% to 3.0% in December’s reading showing the squeeze in UK households was lessening.

– The close of last week saw the pound fall against major currencies such as the US dollar as UK retail sales numbers disappointed markets. In December, UK retail sales fell from 1.5% to 1.4% despite forecasts to rise.

– Throughout the week rumours of a second EU referendum were circulating as former UKIP leader Nigel Farage stated that another vote may be needed. Pro-Leave campaigner Farage said: ‘The Remain side are making all the running. They have a majority in parliament, and unless we get ourselves organised we could lose the historic victory that was Brexit.’

Week ahead

The pound has started the week trending higher against all major currencies bar the rand. Sterling has leapt above the 1.39 barrier against the US dollar (GBP/USD) and remains above 1.13 against the euro (GBP/EUR). The pound has gained some buoyancy after French President Emmanuel Macron suggested that the UK might be able to get a special trade deal following Brexit. Since December, sentiment on the prospect of a trade deal has increased and allowed sterling to rise.

This week, eyes will be on the Davos World Economic Forum, beginning on Tuesday. Over 70 world leaders are scheduled to attend, including Theresa May, Donald Trump, and Emmanuel Macron. The theme for this year’s gathering will be ‘creating a shared future in a fractured world’, which will allow discussions to cover Brexit, technological advancement, inequality, and climate change. Political disruption and the recent surge in populist parties will also be discussed. Bank of England (BoE) Chief Mark Carney is expected to speak on a panel in Davos on Friday.

Regarding economic data, the UK will release public finances stats on Tuesday, followed by the unemployment rate, wage growth, manufacturing, and services figures on Wednesday. UK growth numbers are expected to hit the market on Friday.

EUR – Euro strength concerns ECB Vice President

Last week

– Last week the euro to US dollar (EUR/USD) exchange rate reached a fresh three-year high as the single currency continued to rally and the US dollar went unloved.

– Prospects regarding a German coalition boosted the euro’s appeal to investors, and recent comments from the European Central Bank (ECB) caused investors to buy the single currency.

– However, ECB Vice President Vitor Constancio waded into the debate of tighter monetary stimulus, stating that the stronger euro could severely hinder the central bank’s attempts to get inflation back to reside at its target of just a little lower than 2.0%. He stated: ‘I am concerned about sudden movements [in the EUR exchange rate] which don’t reflect changes in fundamentals.’

Week ahead

Some good news came at the end of last week when Sunday’s government vote saw Angela Merkel one step closer to putting in place a Grand Coalition in Germany. The Social Democratic Party (SPD) voted in favour of beginning formal coalition talks with Merkel and her conservatives, with the party voting 362 in favour against 279 against. SPD chairman Martin Schulz recognised the importance of the event, saying that it was either ‘coalition negotiations or new elections.’ He continued ‘People across Europe are watching this SPD party congress. This is, entirely without a doubt, a key moment in the young history of our party.’

When it comes to Eurozone data, Tuesday will see the release of the latest ZEW German and Eurozone surveys, as well as the currency bloc’s January consumer confidence reading. Manufacturing and services indexes will be out on Wednesday, ahead of the European Central Bank’s (ECB) interest rate decision and follow-up press conference on Thursday.

USD – Dollar languishes at three-year lows as government shuts down

Last week

– The US dollar hit three-year lows last week as improvement in economic growth led experts to believe nations other than the US could begin to tighten monetary policy.

– The US currency also experienced some weakness over the prospect of a government shutdown as markets followed developments.

– Last week, the most recent University of Michigan confidence index showed an unexpected decline from 95.9 to 94.4 in January, despite forecasts to increase to 97.0. Even though sentiment remains high, it’s thought the knock is down to higher petrol prices and an increase in the cost of new vehicles.

Week ahead

Things across the pond have come to a slight standstill while the US government remains closed for the third day in a row after an agreement couldn’t be reached on Sunday to reinstate federal funding. Another Senate vote is set for today at 17:00 UK time, and will add further pressure to the government to come to a resolution which would enable funding through February 8th, and see hundreds of thousands of federal employees able to go back to their jobs. Employees are currently being forced to take unpaid leave as their place of work is closed, while only vital services remain open. One of the sticking points on an agreement has been immigration, and it’s hoped that enough Democrats will back the vote to allow the temporary spending measure. Amid this political chaos, it’s uncertain whether Trump will attend the Davos World Economic Forum event.

Influential figures out in the week ahead will be data like the US advance goods trade balance on Thursday, ahead of the US growth numbers and durable goods orders on Friday.

AUD – More people look for work Down Under

– Last week, figures showed employment had increased every month in a calendar year for the first time in four decades as 35,000 citizens managed to secure work in December. However, the unemployment rate rose as the number of people looking for work increased; the participation rate climbed to a seven-year pinnacle at 65.7%.

– It’s a pretty quiet week ahead for the Australian economic calendar, with only weekly consumer confidence stats out late on Monday, Westpac’s leading index on Tuesday, and skilled vacancies data on Wednesday.

NZD – New Zealand inflation reading ahead

– Last week, risk appetite offered the New Zealand dollar some opportunity to rise. ANZ economist Phil Borkin commented: ‘It’s a world where risk assets are doing well. The global economy is in a big synchronised upswing and people are pretty positive and the New Zealand dollar typically performs very well in that environment and the US dollar doesn’t.’

– The New Zealand performance of services index will be released late on Monday, ahead of credit card spending stats and the highly significant inflation reading on Wednesday

CAD – BoC hikes interest rates; NAFTA remains a concern

– Last week the Bank of Canada (BoC) decided to hike interest rates by 0.25 basis points to reach 1.25%. However, the central bank warned against the upcoming North American Free Trade Agreement (NAFTA) talks and the outlook for the economy. The discussions are likely to impact the Canadian dollar in coming weeks and investors will be carefully watching for any developments.

– An oil price slide of over 1.0% saw the loonie slipping lower, despite data showing Canadian manufacturing sales had jumped by 3.4% in November.

– There are a few figures that could influence the Canadian dollar this week, such as Thursday’s Canadian retail sales, and Friday’s highly influential consumer price index. Inflation is expected to slip from 2.1% in December on the year to 1.9% and could create some loonie softness.

Disclaimer: This economic update is provided by FC Exchange a Global Reach Group Company, industry leaders in foreign exchange. Authorised affiliates are permitted to reuse content.

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