The UK PMI manufacturing index was lower than expected with a decline for February

The UK PMI manufacturing index was lower than expected with a decline to 54.6 for February from a revised 55.7 the previous month.

 

The index remained above the long-term average and overall confidence remained firm with further gains in employment while inflation pressures remained strong. The net consumer lending, money supply and mortgage approvals releases were all stronger than expected, but Sterling came under renewed selling after the PMI data with a retreat to below 1.2350.

 

Wider US strength subsequently pushed the pair to 6-week lows below the 1.2300 level while the Euro strengthened to 0.8580. The government lost an Article 50 Amendment vote in the House of Lords over guaranteeing the rights of EU citizens in the UK. Although there will be expectations that the vote will be over-ruled in the House of Commons, there was some negative impact on Sterling sentiment and the UK currency remained firmly on the defensive on Thursday.

US jobless claims declined to 223,000 in the latest week from a revised 242,000 previously

This was the lowest reading in the current economic cycle and the lowest since 1973 which maintained confidence in a very firm labour market and expectations that the Federal Reserve would move to tighten policy in the short term.

 

Fed Governor Powell maintained an optimistic tone on the outlook and stated that the Fed was very close to meeting its 2% target while a rate increase is on the table for discussion at the March FOMC meeting.

Increased expectations of a March Fed tightening continued to support the dollar, although the Euro did find some support on approach to the 1.0500 level as markets had already moved closer to pricing in a US rate hike with futures markets indicating over a 75% chance of a move.

 

The Euro found some support at the 1.0500 area without making any significant headway as markets waited for comments from Fed Chair Yellen and Vice-Chair Fischer after the European close on Friday.

Euro-zone consumer inflation rose to 2.0% for February from 1.8% and was in line with expectations,

Provisionally, Euro-zone consumer inflation rose to 2.0% for February from 1.8% and was in line with expectations, although this was the strongest reading for four years.

 

Unemployment held at 9.6% for January with markets waiting for any signal of a policy change from the ECB and the inflation data did not provide support to the Euro.

 

Policy is expected to remain on hold at next week’s Council meeting, although comments from President Draghi will be watched closely.

US PCE prices rose 0.4% for January with an annual rate at 1.9% from 1.6% and close to the Fed’s 2% target

US PCE prices rose 0.4% for January with an annual rate at 1.9% from 1.6% and close to the Fed’s 2% target, although the core increase was held to 1.7% and unchanged from the previous month.

 

The ISM manufacturing index rose to 57.7 for February from 56.0 in January and this was the highest reading for over two years which maintained confidence in the outlook. The dollar was still subjected to some profit taking and the Euro rallied back above the 1.0550 level.

 

Fed Governor Brainard stated that the US economy appeared to be in a transition phase to a more stable growth path and that gradual interest rate increases are likely to be appropriate soon. There were also comments that a shrinking of the balance sheet could start before too long.

 

Given that Brainard has consistently been one of the most dovish FOMC members and resisted calls for higher rates, the commentary maintained increased expectations of a March rate increase which continued to support the dollar. The trade-weighted index hit a seven-week high and the Euro was below 1.0550 on Thursday.

US PCE prices rose 0.4% for January with an annual rate at 1.9% from 1.6% and close to the Fed’s 2% target

US PCE prices rose 0.4% for January with an annual rate at 1.9% from 1.6% and close to the Fed’s 2% target, although the core increase was held to 1.7% and unchanged from the previous month. The ISM manufacturing index rose to 57.7 for February from 56.0 in January and this was the highest reading for over two years which maintained confidence in the outlook.

 

The dollar was still subjected to some profit taking and the Euro rallied back above the 1.0550 level.

Fed Governor Brainard stated that the US economy appeared to be in a transition phase to a more stable growth path and that gradual interest rate increases are likely to be appropriate soon. There were also comments that a shrinking of the balance sheet could start before too long.

 

Given that Brainard has consistently been one of the most dovish FOMC members and resisted calls for higher rates, the commentary maintained increased expectations of a March rate increase which continued to support the dollar. The trade-weighted index hit a seven-week high and the Euro was below 1.0550 on Thursday.

Dollar gains dominated the European morning on Wednesday after Fed Dudley’s hawkish comments overnight

Dollar gains dominated the European morning on Wednesday after Fed Dudley’s hawkish comments overnight and the Euro dipped to below 1.0550 against the US currency, although rising German yields eased net selling pressure to some extent.

 

German consumer process rose 0.6% in February with the annual inflation rate rising to 2.2% from 1.9% previously and this was the highest rate for over four years.

 

With German unemployment continuing to decline, there will be expectations of higher wage settlements which could also unsettle the Bundesbank and increase pressure for a tighter monetary policy.

Monetary Policy Committee (MPC) member Hogg stayed close to the bank’s recent script and there was no market impact

In testimony to the Treasury Select Committee, new Monetary Policy Committee (MPC) member Hogg stayed close to the bank’s recent script and there was no market impact.

 

There was choppy trading surrounding the Afternoon fix, but the UK currency was unable to gain sustained support, especially with real yields continuing to move against Sterling. The Euro edged towards 0.8550 on the day and the UK currency was unable to hold above 1.2450 against the dollar.

 

Scottish First Minister Sturgeon stated that a new independence referendum may be the only way for Scotland, maintaining a significant element of market unease surrounding the political outlook and the government could face defeat on in the House of Lords on an amendment to the Brexit Bill. Dollar developments dominated as Sterling retreated to below 1.24.

 

The latest PMI data will be watched closely on Wednesday while shop prices fell 1.0% in the year to February.01/03

US fourth-quarter GDP was unrevised at 1.9% compared with expectations of an upward revision

US fourth-quarter GDP was unrevised at 1.9% compared with expectations of an upward revision to 2.1% as a higher estimate for consumer spending was offset by a downward revision to government spending and investment.

 

The Chicago PMI index was notably stronger than expected with an increase to 57.4 for February from 50.3 with robust gains in employment and prices on the month. The latest consumer confidence reading was also stronger than expected with an increase to 15-year highs of 114.8 from 111.6 in January which underpinned confidence in the spending outlook.

The dollar was still unable to gain any support as the Euro broke above 1.0600 with choppy trading into the London fix. San Francisco Fed President Williams stated that a March rate increase was up for serious consideration given full employment and accelerating inflation which provided fresh dollar support. New York Fed President Dudley stated soon after, that the case for interest rate increase is now more compelling and that there had been a very large rise in household confidence together with very buoyant financial markets.

 

Dudley’s comments had a more substantial impact in boosting the US currency as futures markets indicated that the chances of a March rate increase were now well above 50%. The Euro retreated to test support near 1.0550 as the dollar gained strong support against all majors.