With the UK government meeting with the EU at the start of this month to initiate their EU-UK trade talks, the door has once again been left open for the possibility of a ‘no-deal’ Brexit. This came after the UK unveiled their plans to strive for a Canadian style trade deal with the EU. The market saw this as bold, but some noted that this could be over-ambitious from the UK. As a result, the whispers of a ‘no-deal’ Brexit re-ignited, under the chance that the two parties may not come to a mutual agreement.
To add further pressure, the EU responded to the UK’s demands with threats that could hinder UK business in the EU. The EU proposed that it may tighten its MiFID regulations on the UK which have already been criticised for increasing the difficulty of doing business and creating significant costs for the financial industry. As a result of this direct threat, the GBP lost strength as one of the City of London’s major trades is within the financial sector.
The UK government announced a cabinet reshuffle in the latter stage of this week. The reshuffle saw ex-chancellor Sajid Javid replaced by the new chancellor Rishi Sunak. With the change, markets are tipping an increase in public sector spending from the government. With the recent announcement of the HS2 railway project, the government hopes that an increase of support for the GBP will be initiated following the increase spending as fiscal stimulus receives a boost.
The UK also received a helping hand from its economic releases this week. The week saw an improvement in construction, services, manufacturing and GDP for the UK economy. As the economy shows signs of growth, the currency received further support as the Conservative government appeared to be backing up their notion that UK businesses would boom following the General Election last year.
The euro started the week on a relatively high point following the release of their manufacturing and services PMIs which both showed a positive uptick in value. With manufacturing rising 0.1% and services climbing up 0.3%. Following these data releases, The European Central Bank’s (ECB) President Christine Lagarde gave a speech which spoke about the rebound of the euro and optimism moving forward. This gave the euro some momentum as the market was reassured by the central bank’s comments. However, this optimism didn’t last long, with the Eurozone’s industrial production figures dropping from -1.7% to -4.1% year-on-year. This poor result came the day after the ECB Presidents speech which saw the sentiment around the euro turn sour.
Unfortunately for the euro the disappointment did not stop there. Friday saw the release of the German and Eurozone’s GDP values for Q4 in 2019. Both figures showed the slowest rate of growth since 2013. Germany only showed a 0.6% growth for the year in 2019 following the soft finish in the final quarter. Whilst the Eurozone’s GDP declined from the previous year’s Q4 growth of 1.2% to 0.9%. Both figures suggest the Eurozone is facing an economic slowdown, which contradicts the optimism displayed by the ECB in their Tuesday speech. As a result, the euro has fell out of favour with investors and currently struggles as rival currencies like the GBP edge over it.
With little in the way of data releases for the EU until mid-week next week, the currency is likely to stagnate until it can find a stimulus. Next week’s ECB Monetary Policy Meeting Accounts could help the euro should the central bank find some optimism moving forward. Whilst February’s services and manufacturing flash PMIs could help the euro, unless the impact of the coronavirus shines through to dampen the reports on exports.
The coronavirus outbreak in Wuhan, China has helped the USD gain over many of its rival currencies in recent weeks. It held the title of the safest currency amid the outbreak due to other safe-haven currencies like the Japanese Yen and Swiss Franc holding significant trade ties with China which made them less desirable. With fears heightening about the virus, many investors flooded into the USD which helped it start the week on the front foot. With little in the way of data releases until Thursday, the USD observed the shifting across the market via other currency events.
However, with fears now reducing surrounding the virus and China reporting a lower incidence rate of infection, the USD could start to decline as support edges away following the lift in market risk appetite.
Should the USD begin to lose out on safe-haven investors, the economy is likely to be able to more than support itself following its recent run of economic data release success. This week saw the United States’ jobs and consumer price index figures rise. The initial jobless claims were lower than the market had anticipated, and the continuing jobless claims came in under the previous figures’ threshold. Despite domestic success, the price of oil has recently inflicted damage on the USD. With a rise in market risk appetite due to a reduced fear surrounding the coronavirus, the price of oil has begun to climb back up. This means that the USD has slumped against oil-correlated currencies like the Canadian dollar in the latter stage of this week.
The Wuhan coronavirus outbreak has been a topic which has taken the top spot of headlines for weeks. This has been justified as the number of individuals infected has skyrocketed with the death toll in double figures. The outbreak saw the AUD drop as the risk-sensitive currency lost favour with investors as they fled to safe haven currencies like the USD. After news broke last week of a potential treatment being discovered, the AUD recovered many of its losses as investors risk-sentiment began to return.
But Australia remains cautious as any spikes in infection could see the currency sharply decline. The rising death toll has kept the AUD from rising substantially.
The AUD was offered a helping hand this week as the December home loans figures were released. The figures came in above expectations, rising from -0.8% to 3.5%. This was a huge surprise to the market and helped the AUD rally, leading to the currency edging over sterling. This week also saw the release of December’s Australian Investment Lending for Homes report increase; the data showed that the figure had risen from 2.5% to 2.8%. This news boosted the market’s confidence further in the Australian economy.
In the past week, the AUD has managed to shrug off the worries of the coronavirus in order to be labelled as one of the week’s top performers. The AUD’s recent strength came after investor fears begin to fade over the coronavirus and increasing bets that the antipodean central banks will not cut interest rates soon. However, analysts at Westpac have questioned the viability of the rally and warned that the RBA may consider introducing QE methods soon. Should this be the case, the AUD would likely see a downturn in its recent success on the economic front.
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