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.
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, 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 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.
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 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.
The Euro traded in narrow ranges during the European session on Tuesday with resistance on approach to the 1.0600 area and little in the way of fresh Euro-zone developments as concerns surrounding the French Presidential election eased slightly.
The headline US durable goods orders report was stronger than expected with a 1.8% increase for January, but the figure was inflated by aircraft orders and underlying sales declined 0.2% on the month following a revised 0.9% gain for January. Pending home sales data was weaker than expected with a 2.8% decline for January which pushed annual growth to 12- month lows. The Euro rallied to highs around 1.0630 after the US data as the dollar faded slightly.
Dallas Fed President Kaplan stated that the Fed should increase interest rates in the near future which helped boost speculation of a rate hike in March with futures markets indicating the chances of a move had increased to around 50%. The shift helped underpin the dollar and the Euro retreated below 1.0600 and held just below this level on Tuesday.
The latest Euro-zone money supply growth data was in line with consensus expectations as growth slowed slightly to 4.9% from 5.0% previously while private loan growth was slightly stronger for the month at 2.2% from 2.0% previously.
Euro-zone economic confidence edged higher for February to the highest level since 2011 which underpinned growth hopes.
The latest Opinionway opinion poll for the French Presidential election registered a small improvement for Macron which provided net Euro support as concerns surrounding a potential Le Pen victory faded slightly.
For the second month running, UK retail sales data was notably weaker than expected with a 0.3% decline in volumes for January from a revised 2.1% decline the previous month and expectations of a 0.9% monthly gain.The annual increase slowed sharply to 1.5% from 4.3% in December.
The sharp increase in fuel prices had an important impact in curbing volumes and the data overall will maintain overall expectations that higher prices during 2017 will have an important impact in undermining sales growth which will undermine the wider economic growth trends.
Sterling weakened further after the data with the Euro strengthening to the 0.8580 area while the UK currency retreated to lows below 1.2400 on reduced expectations that the Bank of England would tighten policy.
There was some resilience at lower levels and the UK currency held above 1.2400 on Monday as the Euro retreated to below 0.8550.