UK Trade Deficit Expands, Pound (GBP) Exchange Rate Rally Ends
The Pound’s (GBP) rally was cut short on Friday as markets responded to a mixed bag of UK ecostats. This included the UK’s trade balance reading, industrial production figures, manufacturing production figures and the construction output statistics.
Out of all of these readings the UK’s trade deficit proved the most significant, printing at £-4.896bn year-on-year in December, down from the previous period’s £-3.65bn and significantly below the forecast of £-3.2bn.
This was the UK’s largest trade deficit since September 2016 – a result primarily driven by an increase in oil imports from Europe.
Industrial production also proved soft, falling -1.3% month-on-month in December after taking a hit from the shutdown of the Forties North Sea oil pipeline, whilst manufacturing production was slightly better, printing at 0.3%, up from the previous 0.2%.
Construction output contracted by -0.2%, down from the previous period’s 0.8% growth but above the forecast of -0.6%.
Combined with the understanding that a rate hike in May will be largely dependent on progress in Brexit negotiations this news weighed heavy on the Pound.
GBP/EUR Exchange Rate Slips – German Coalition Deal in Focus
The Pound Euro (GBP/EUR) exchange rate slipped on Friday as markets responded to the run of soft ecostats from the UK.
Domestic data from the Eurozone bloc is entirely absent today, leaving markets to focus on yesterday’s German figures and the ongoing attempts there to form an effective government.
Chancellor Angela Merkel’s Democrats (CDU) have successfully clinched a deal with Martin Schulz’s Social Democrats (SPD), although not without massive concessions.
The deal – reached some four months after Germany’s election resulted in a stalemate – cedes the crucial Finance Minister post to the SPD in an exchange for a fourth term in office for Angela Merkel.
This has been regarded by many as a blunder, with the CDU’s own Christian Von Stetten describing the decision as a ‘political mistake’.
Other hurdles remain.
The SPD’s 464,000 members have to ratify the deal in a vote before anything is set in stone, with the results set to be announced on 4 March.
GBP/USD Exchange Rate Down Despite Latest US Government Shutdown
The Pound US Dollar (GBP/USD) exchange rate pared some of its recent gains on Friday, failing to capitalise on news that the US government has entered its second shutdown of 2018.
A last-minute manoeuvre by Senator Rand Paul effectively delayed consideration of the bipartisan budget package, a result that forced a temporary shutdown.
This shutdown is not expected to last for very long, however, with the measure expected to pass both the Senate and House of Representatives before the majority of federal employees turn up for work.
Today is also a quiet data day in the US, though market sentiment continues to ride a wave of optimism on recent hawkish comments that pointed to a rate hike from the US Federal Reserve as soon as March.
GBP/CAD Exchange Rate Remains within a Narrow Band as Crude Oil Prices Suffer
Crude oil prices continued to struggle on Friday morning, limited by recent news that US stocks are a lot higher than anticipated.
This has contained the Pound Sterling Canadian Dollar’s (GBP/CAD) fall somewhat, keeping the pairing within a narrow band of trade.
Looking ahead, markets are currently anticipating Canada’s run of employment readings, with a rise in unemployment expected in January from 5.7% to 5.8%.
If this occurs then GBP/CAD may find sufficient space to rally.
GBP/AUD Exchange Rate Tumbles on Positive Quarterly RBA Statement
The Pound Australian Dollar (GBP/AUD) exchange rate tumbled on Friday morning, switching into the ‘Aussie’ Dollar’s favour as markets responded to the Reserve Bank of Australia’s (RBA) quarterly statement on monetary policy.
The statement said that the bank continues to anticipate a pick-up in Australian economic growth over the next two years, adding that unemployment is also expected to decline faster than previously expected, but that inflation will remain below the 2-3% target range until the middle of next year.
The optimism, at least, helped bolster the Australian Dollar after the bank’s recent dovish policy decision, but the issue of limp inflation continue to hamper the Australian Dollar’s near-term outlook.
GBP/NZD Exchange Rate Down Despite RBNZ Cutting Growth, Inflation Forecasts
The Pound New Zealand Dollar (GBP/NZD) exchange rate pared some of its recent gains on Friday, failing to extend its recent rally as markets reacted to the UK’s significant trade deficit expansion.
The ‘Kiwi’ Dollar continues to be encumbered by the Reserve Bank of New Zealand (RBNZ) slashing their forecasts for growth and inflation at their latest monetary policy meeting – a decision that further dimmed market hopes for a rate hike in 2018.
Furthermore, Westpac’s analysis of the rate decision was notably dovish, with the group asserting that they do not ‘foresee an OCR hike until late-2019 at the earliest’.
Looking ahead, markets will be keen to assess the New Zealand REINZ house sales figures for January, which is due early next week.