Sterling loses considerable ground against dollar and euro

Wednesday 27th January 2016 07:17 EST

It’s been a mixed week for sterling, initially losing and then gaining slightly against the Euro, Dollar and Japanese Yen. The FTSE had a bad day on the 13th however it has so far managed to fend off falling into the bear trap, trading around 19 per cent off its all-time high of 7,103 in April last year. A key measure of a bear market is an index trading 20 per cent lower than its peak. This fueled fears that this we might be entering a bear market. Most notably, on Thursday we had the monthly inflation figure form the UK that came in better than expected at 0.2% versus an expected 0.1%. 

However, sterling continues to be put under pressure as Mark Carney spoke a few hours later and said that ‘now is not yet the time to raise interest rates.’ This is because of a ‘renewed collapse in oil prices, the volatility in China, and the moderation in growth and wages here at home since the summer’. For Carney, there is ‘not enough cumulative progress … to warrant tightening monetary policy.’ Consequently, sterling lost considerable ground against dollar and euro.  Also, last week wage growth in Britain slowed in the three months to November even though unemployment fell to its lowest since early 2006, underlining why the Bank of England is saying it will take its time before raising interest rates. 

The tail end of the week saw some ground gained as Sterling edged up as investors focused on strong job creation that took the unemployment rate to 5.1 percent.
The rapid fall in joblessness since 2013 has wrong footed the British central bank, which had expected wage growth to pick up more quickly than it has.

Lastly, the UK’s retail sales figure showed consumers reined in their Christmas spending by the biggest amount in over six years but there was more cheer for Chancellor George Osborne after government borrowing dropped sharply.  The retail numbers added to signs that Britain's economy slowed late last year and Osborne will still struggle to meet his budget goals for the tax year which ends in March. 

Turning to the other side of the Atlantic, the US Dollar continues to the weather the storm in worldwide currency markets. Given near record low oil prices and a slowdown in China, greenback is being viewed as a safe haven currency allowing it to hold its own against its major peers in recent weeks. Over the last week, manufacturing activity contracted less than expected in January according to the latest survey from the Philadelphia Federal Reserve. The Philly Fed manufacturing index came in at -3.5, better than expected and up from last month's -10.2 reading. Expectations were for the report to come in at -5.9.
The report's reading on future expectations, however, continued to decline and is now at the lowest levels since November 2012. January's special question to survey respondents was about energy prices and the impact they are and will have on business activity, with most firms responding that the net effects have been positive. All in, it has been a relatively quiet week for the dollar.

Looking at the Eurozone, there has been some salient data out and Mario Draghi, like always, made remarks that moved the Euro markets. To begin the week, French President Francois Hollande has declared that France, one of the largest Eurozone economies, was in a state of Economic emergency, with unemployment at 10.6%. Hollande will introduce a €2bn job creation plan. Under a two-year scheme, firms with fewer than 250 staff will get subsidies if they take on a young or unemployed person for six months or more. 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. 

Furthermore Germany, the largest Eurozone economy, released its ‘ZEW Economic Sentiment that came out at 10.2 against an expected 8.2. This is a gauge of the sentiment of investors and analysts for the next 6 months on the outlook of the German economy and is a good indication of economic health and future economic activity. Euro’s ability to stand its ground against dollar given such divergent monetary policies has proved surprising over the last month.
With regards to interest rates, they were left unchanged staying at 0.05% and the overnight deposit rate again left unchanged at -0.3%. Mario Draghi said rates would stay at present or lower levels for an extended period and there would be no limits to action to reflate the Eurozone. He went on to say they have the power, willingness and determination to act and will do so willingly if need be. He would not rule out again putting in place an expansionary monetary policy to help the Eurozone economy at the next meeting in March.
Again, the recent fall in oil prices is what is being sighted as the biggest cause for concern for the ECB and all central banks. In December when Draghi threw a massive curveball out there and said the Eurozone economy was performing well, he expected inflation to read 1% in 2016. However that forecast was generated on the assumption that oil prices would average more than $50 a barrel but now its at $30 a barrel. The Euro lost ground during Friday’s session after French and German manufacturing figures disappointed and Mario Draghi said he would act to improve the Eurozone’s disappointing inflation levels.  Sharp falls in the price of oil, slowing growth in China and steep drops in financial markets have raised new questions about the strength of Europe's economic recovery and the ECB's ability to steer inflation back up to its target level of close to two percent. Lastly, the IMF has cut its world growth forecast for the next two years by 0.2% and warning that the recovery from the financial crisis could be derailed if key challenges are mishandled.

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