Yesterday, sterling lost some ground against the dollar on a day where some economist emitted a sigh of relieve as macro data once again dominated over Brexit headlines. Growth data showed the UK economy shrank in December by 0.4% on a monthly basis, pointing to a preliminary quarterly slowdown of 0.2% from 0.3% expected and a previous 0.6% expansion in Q3. As noisy as this monthly data could be, it nonetheless reflects the extent to which Brexit uncertainty has damaged the UK economy along with the spillover effects of a wider regional European growth slowdown. As far as Brexit uncertainty is concerned, the scenario is still far from clear, with Theresa May today addressing the lawmakers in the House of Commons asking for more time to renegotiate her Brexit deal with the European Union. Meanwhile, Bank of England Governor Mark Carney will speak at 13:00 GMT on the risks to the economic outlook.
The euro had its lowest close in three months yesterday as the single currency anxiously awaits Germany’s Q4 GDP reading on Thursday. Bloomberg survey data, however, is not too optimistic with the pace of the Eurozone recovery, as shown by forecasts released yesterday. Surveyed economists are estimating the German economy will expand by a mild 0.1% in Q4, from a 0.4% foreseen previously, but concerns on a possible technical recession are also piling up. For France and Italy, growth prospects were also revised down. The French growth forecast for 2019 has been the lowest since the beginning of this survey at 1.3% while Italy is now expected to stagnate at zero growth in the first two quarters of the year. Overall, this fits with the Eurozone growth that has been revised by the European Central Bank to 1.4% from 1.5% previously. All in all, hopes for European Central Bank rate hikes are now pushed back for Q2 2020. Today we may hear more about the nomination of the Irish Philip Lane to succeed the current ECB President Mario Draghi. As Draghi is renowned for his ultra-loose monetary policy era, some hope this will lead to a hawkish shift in the ECB’s Governing Council.
The greenback strengthened for the eight day in a row against a basket of major currencies, regaining terrain lost earlier in January and putting its longest rally on the board in three years. Like the sun breaking through the clouds everything suddenly looked a lot sunnier after it was reported President Trump is willing to meet the Chinese President Xi in an effort to end the trade war, while Congressional negotiators reached a tentative deal to prevent another Government Shutdown from happening this Friday. The reaction of the US dollar to this positive news is somewhat surprising, given the fact USD recently seemed to strengthen on the back of negative developments that led to safe haven flows. This can be seen as an indicator that the strength of the dollar should not be underestimated, as it appears to gain ground whatever happens, especially as it comes to trade sentiment. Another interpretation could be that we have arrived at the point where the damage of trade wars to the American economy supersedes the benefit to the greenback from safe-haven flows. Fed Chair Jerome Powell speaks today at 17:45 GMT, though monetary policy is unlikely to feature in his speech tonight.
The loonie joined the advancing march of the US dollar yesterday on a day that saw improved sentiment towards trade as Trump showed his willingness to meet with Chinese President Xi. Despite a lackluster oil market, this was enough for CAD to strengthen against most currencies, although it had to concede some terrain against USD.