The UK continues to display a resilient economy with strong growth and labour markets approaching full employment. Fourth quarter GDP growth came in at 0.4%, giving overall growth of 1.7% for 2017. This is substantially higher than the estimate of just 0.5% after the Brexit referendum and provides support to sterling. At the same time, inflation is starting to subside with February’s annual figure dropping from 3.0% to 2.7%. This positive growth and improving inflationary background has also seen unemployment fall to a new low of 4.3%, whilst wage growth increased in January to 2.8%. This combination will ease pressure on the UK consumer and looks positive for 2018.
For this shorter week, the data from the UK is restricted mainly to Purchasing Manager Indices. This morning’s manufacturing data was slightly better than expected and still shows strong expansion. Tomorrow we turn to construction and on Thursday we will visit the important services PMI figures. An expansion is expected to continue on all fronts, which is likely to support sterling.
GBPEUR – 1.1421
GBPUSD – 1.4082
The past week’s data show Eurozone business confidence continuing to move lower this year, partly reflecting concerns about rising global protectionism. Meanwhile, Eurozone consumer price inflation has drifted lower over the past year, as CPI inflation fell to 1.1% in February. The ECB has reduced its monthly asset purchases to €30bn and is expected to wind down its programme after September. Comments from Bundesbank President Jens Weidmann point to higher interest rates from the middle of 2019. This is moderated by others such as the Bank of Finland’s Erkki Liikanen more cautiously noting that a sustained pickup in underlying inflation is needed.
There are a number of high profile German data points on this shorter trading week. We started Tuesday with German retail sales, much weaker than estimates, though manufacturing PMI continued to show strong expansion. Wednesday sees Eurozone core inflation, expected to increase from last month and unemployment. Eurozone retail sales due on Thursday may return lower than expected figures following the German component today.
EURUSD – 1.2330
EURGBP – 0.8756
Across the pond, the US economy grew by 2.3% last year. The US has also started this year with a resilient economy. There have been better than expected employment gains of 200k and above with unemployment steady at 4.1%. The Federal Reserve’s preferred measure of inflation, PCE, continues to hold around 1.7%. The forward-looking data is also encouraging, with the ISM surveys rising to recent highs. These robust economic conditions suggest that the Fed will continue on the path of interest rate normalisation.
The most important figures this week will be the non-farm payrolls, released on Friday. Ahead of Friday, there is further significant data with ADP employment figures on Wednesday and balance of trade on Thursday. If we continue to see positive results from employment levels and average earnings, the dollar should remain supported. There are a number of Fed speakers who may provide further insight into the future path of rates based on recent data. The news ahead of Friday is, however, more likely to provide coverage of the tariff proposals put forward by the US and China.
GBPUSD – 1.4082
EURUSD – 1.2330
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*Rates correct as at 9am on the date of publishing
