Highlights from last week:
- BoE votes 8-1 to keep interest rates at 0.25%
- Sterling/US dollar hits two-week high over $1.24
- US Federal Reserve lifts interest rates by 0.25%
The week ahead:
- UK consumer inflation data (Tuesday, 9.30am)
- New Zealand interest rate decision (Wednesday, 8.00pm)
- UK retail sales data (Thursday, 9.30am)
BoE dissenter votes to raise interest rates
Sterling jumped to two-week highs above US$1.24 against the dollar last week after the Bank of England (BoE) confirmed an 8-1 vote to keep rates at 0.25%. The key surprise was the dissenting vote of Kristin Forbes who favoured an immediate interest rate hike amid rising inflation and the economy’s continued resilience since the Brexit vote.
Sterling had been trading an eight-week low versus the dollar earlier in the week, with the UK’s looming political challenges still weighing heavily. The passage of the government’s Brexit bill through Parliament means Theresa May now has the green light to trigger Article 50 initiating formal EU exit talks. Nicola Sturgeon also confirmed that she would push for a second Scottish independence referendum, although the impact was softened by acknowledgment that any new referendum wouldn’t happen until late next year at the earliest and publication of YouGov poll suggesting Scottish voters favour remaining in the UK by a 57% to 43% margin.
Wednesday’s UK labour market data offered conflicting signals. Average weekly pay growth including bonuses slowed to 2.2% in the three months to January, from 2.6% previously, despite the jobless rate falling to its joint-lowest level since 1975. In tandem with the squeeze on real income gains from rising inflation, a key risk remains that consumer spending appetite will wane as alluded to in the recent run of weakening retail sales figures.
US Federal Reserve lifts interest rates by 0.25%
Expectations that the US central bank could lift interest rates more quickly than expected had been a supporting factor for the US dollar in recent weeks. As anticipated, the Federal Reserve lifted its target interest rate range by 0.25% to 0.75%-1.0%. However, the dollar lost ground as the Fed’s central forecasts for three interest rate hikes over the course of 2017 were unchanged, disappointing some expectations that it could signal a more aggressive pace of increases.
Dutch elections offer broader support for the euro
Last week’s Dutch elections were widely seen as a barometer of wider anti-EU sentiment ahead of French and German elections due later in the year. Victory for incumbent centre-right Prime Minister Mark Rutte, brushing aside the challenge from Geert Wilders’ anti-immigration Freedom Party, kept the euro broadly supported. Whilst the sterling/euro exchange rate rose above €1.15 after the Bank of England’s policy announcement, this is still some way below the highs of around €1.19 seen as recently as a month ago.
Australian and New Zealand data disappoint
New Zealand economic growth underwhelmed in the final quarter of 2016, missing expectations of a 0.7% growth rate by expanding just 0.4% - its weakest quarterly growth since the second quarter of 2015. The sterling/New Zealand dollar rate had been trading under NZ$1.7450 on Wednesday prior to the data, but had rebounded to above NZ$1.77 by late-Thursday. The Australian dollar was more resilient than its New Zealand counterpart, despite data showing Australia’s jobless rate rose to a higher-than-expected 5.9% in February. The data didn’t prevent sterling falling to four-month lows near the AU$1.59 level on Thursday morning, before it rallied back above AU$1.61 later in the day.
The week ahead
Several UK data releases could be important for sterling’s fortunes this week, including consumer price inflation data (Tuesday, 9.30am) and retail sales data (Thursday, 9.30am).
Updates on the euro zone economy’s progress will come in the form of March’s preliminary manufacturing and services PMI readings (Friday, 9.00am).
The US release schedule is slightly quieter in terms of data which could have significant impact on the dollar this week, although existing home sales figures (Wednesday, 2.00pm), new home sales data (Thursday, 2.00pm) and March’s preliminary manufacturing PMI data (Friday, 2.45pm) will garner some interest.
Other key data releases:
Reserve Bank of Australia policy meeting minutes (Tuesday, 12.30am)
Bank of Japan policy meeting minutes (Tuesday, 11.50pm)
Canadian retail sales data (Tuesday, 12.30pm) and consumer price inflation data (Friday, 12.30pm)
Reserve Bank of New Zealand interest rate decision (Wednesday, 8.00pm)