Pound continue to weaken

Wednesday 20th January 2016 06:14 EST

The weakness seen in the pound continued starting the week with industrial production slipping below forecast 0.7% in November, the biggest slide in 3 years, mainly due to low domestic demand for electric and gas. UK manufacturing also slipped 0.4% over the month. 

However all eyes were focused on ‘super Thursday’ where the Bank of England's rate-setting committee held interest rates at historic lows, while cutting forecasts for economic growth and inflation. The monetary policy committee voted 8-1 in favour of keeping the benchmark interest rate at 0.5 per cent, with lone hawk Ian McCafferty staying in favour of a rate rise despite concerns over the global economy. The BoE also lowered its forecasts for UK economic growth last quarter and this quarter by 0.1 percentage points to 0.5 per cent after data showed the manufacturing sector had shrunk by 1.2 per cent annually. Policymakers said the recent oil price fall would weigh slightly on inflation in the coming months, which is currently 0.1 per cent, sitting well below the Bank’s target of two per cent.  Over the Christmas period British retail spending recorded its weakest quarterly growth in more than a year. The British Retail Consortium said retail spending rose by a "disappointing" 0.9 percent in the three months to December compared with a year earlier. It was the slowest rise in retail sales values since the three months to November 2014. In December alone, retail sales rose just 1.0 percent after a 0.7 percent increase in November. Sterling hit a 5-1/2 year low against the dollar on Friday, completing its third straight week of losses, as investors grew increasingly concerned about Britain's economic outlook and pushed back chances of a rate hike to early 2017. Worries about a referendum on Britain's membership of the European Union have also intensified and weighed on sterling in recent weeks. Prime Minister David Cameron has promised a referendum by the end of 2017, though it may come as early as June this year. With the outcome unclear, investors are bracing for volatility and these concerns have also been central to sterling's weakness since the start of December.US data started strong, with Labour Market Conditions Index (Dec), coming out at 2.9 which is higher than the previous 2.7. A reading above 0.0 indicates improving labour market activity, below indicates deteriorating activity. So this is positive data for the US, however it is not a huge market mover. A Federal Reserve Survey showed the U.S. economy expanded across most of the country in the past six weeks as the job market showed strength. The report released underscores the challenge facing Fed policy makers heading into their meeting later this month: The labour market is strengthening without triggering signs of higher wages or inflation more broadly. The US had slightly disappointing jobs figures on Wednesday when the number of applications for unemployment benefits unexpectedly increased last week; a sign labour market momentum may be starting to cool.The dollar tumbled to a near five-month low against the yen and a 2-1/2-week trough versus the euro on Friday, hammered by a combination of poor risk appetite arising from a renewed drop in oil prices and weak U.S. economic data. The downbeat economic numbers along with the meltdown in oil and stocks could further slow the pace of the Federal Reserve's already gradual tightening policy, a negative scenario for the dollar. Many feel the Fed is going to be reluctant to raise interest rates any time soon, with too much uncertainty emanating from weak U.S. data, and equity markets getting clobbered, effecting US growth. Data showed on Friday that U.S. retail sales fell in December as unseasonably warm weather curbed purchases of winter apparel and cheaper gasoline weighed on receipts at service stations.U.S. producer prices were also lower last month due to weak energy costs, while the country's industrial output declined for a third straight month. Following the poor U.S. economic data, the interest rate futures market has now priced in just one additional rate move by the Federal Reserve this year, compared with previous expectations of three hikes.

We saw a quite week for the Euro however on Monday 18th January, French President Francois Hollande declared that France was in a state of Economic emergency, with unemployment at 10.6%. Hollande plans to tackle this with an introduction of a €2bn job creation plan. This shows that the French economy is in a potentially dangerous position, with high unemployment and public debt, with France being one of the EU’s biggest economies this could cause worry in financial markets.

In terms of data for the euro it was pretty much quiet except industrial production saw a decline of 0.7% in November 2015, compared with the previous month. In terms of the yearly change, we saw an increase of 1.1%, less than the forecast of 1.3%. The market was expecting the volume of production of Industries such as factories and manufacturing to decrease by 0.3% in November 2015, compared with the previous month. The outcome was disappointing, as the Euro Area Industrial Production declined by 0.7 

Overall, the main factors influencing the major currencies were due to oil prices dropping substantially and turmoil in China. Elaborating on this briefly Oil hit their lowest since 2003 on Monday , as the market braced for a jump in Iranian exports after the lifting of sanctions against the country over the weekend. With speculation placing Brent Crude at $20 a barrel in some cases.

China saw its economy grew at its slowest rate in a quarter of a century in 2015, increasing pressure on Beijing to address fears of a prolonged slowdown and ease the jitters affecting global markets. Full-year growth of 6.9% was only just short of government expectations of 7% but by contrast, growth in 2014 stood at 7.3%.

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