Sterling rallied against both USD and EUR yesterday, as the latest gross domestic product figures suggested that the economy rebounded in December. GDP grew 0.3% in December after contracting in November, leaving growth over the fourth quarter as a whole at 0.0%. The pattern of the data suggests that the economy saw a sharp contraction around the middle of Q4, which survey data such as PMIs suggest was due to political uncertainty, and that the outlook has improved since. UK monthly trade data were also volatile yesterday, with December’s Trade Balance rising to a surplus of £7.7bn. For context, this surplus is the largest in recorded history and is the fifth recorded monthly surplus this millennium. The details of the report made for less sensational reading, however: once trade in precious metals is removed, the balance once again fell into a deficit. Concerningly, services exports also declined sharply. Michel Barnier was also quick to rebuff the idea that the UK would have permanent equivalence arrangements with the EU after leaked policy papers suggested this would be the UK’s opening position.


EURUSD touched a six-month low yesterday as MNI reported that European Central Bank officials believed the chances of an interest rate cut were higher, if economic data continued to disappoint and coronavirus persists as a threat to global trade. The downfall was short-lived however, and the single currency soon got back to flat on the day after testimonies from both the Federal Reserve Bank’s Jerome Powell and the ECB’s Christine Lagarde. Lagarde voiced concerns around risks associated with prolonged expansionary monetary policy, arguing that while central banks have done a lot to stimulate growth, there is a limit to what monetary policy can accomplish, implying that fiscal policy should play a greater role in future. Dutch consumer price indices released this morning slumped by 0.8% month-to-month in January, the biggest drop in four years, but did not surpass the equivalent eurozone harmonized CPI, which fell 1.3% month-to-month.


Improving risk appetite weighed on the US dollar yesterday and overnight, as the greenback sold off against NZD, AUD, RUB, and most other major currencies. Fed Chair Jerome Powell testified to lawmakers from the House on monetary policy and warned of risks to the global economy from the coronavirus infection, which he said was being closely watched. As usual, Powell steered clear of giving any specific changes to forward guidance or the general stance of Fed policy, which remains characterised by caution and a dovish bias. Yesterday’s data included job turnovers, which fell sharply in December to 6,423,000. This is the lowest figure since 2018, and combined with the above-trend rate of net job creation seen in recent months, may suggest workers are less willing to leave their jobs in search of other opportunities.


The loonie clawed back its losses over the last two trading days in yesterday’s session, rallying some 0.23% against the dollar. The move came in tandem with a general risk-on mood, while the rally in oil prices helped the Canadian dollar along the way. With global bond yields rising as fears over the coronavirus abate somewhat, Canadian front-end bonds remain around 5 basis points higher than its US counterpart.



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