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Sterling advances on ‘Soft Brexit’ hopes

Mon 15 January 2018

Highlights from last week:

  • Prospect of a softer Brexit spurs pound
  • Euro firmer following stellar employment figures
  • Buoyant retail sales fail to lift US dollar

The week ahead:

  • UK consumer inflation data (Tuesday, 9:30am)
  • Euro zone consumer inflation data (Wednesday, 10:00am)
  • US industrial production data (Wednesday, 2:15pm)

Pound reaches 18-month highs versus US dollar

Sterling rose to its highest level since Britain voted to leave the EU against the US dollar on Friday afternoon, boosted by the improved possibility of a ‘Soft Brexit’.

Sterling touched highs of US$1.3744 and advanced against a number of its other currency peers after media reports suggested Spanish and Dutch finance ministers have agreed to push for a Brexit deal that keeps Britain as close to the European Union as possible.

Domestically, manufacturing output for the month of November marked its seventh straight month of expansion, rising at its fastest pace since 2008. The rise of 3.9% was largely thanks to the production of cars, boats and planes, whilst elsewhere, industrial production rose 0.4%.

Not all economic releases were positive however. UK construction output slumped by 2.0% during the three months running to November, marking the largest quarterly fall since 2012.

Euro’s positive start to 2018 continues

The euro edged higher against the pound and tipped three year highs against the US dollar last week as euro zone economic releases continued to impress.

The zone’s labour market continued its recovery in November with figures revealing the rate of unemployment fell to its lowest level in nine years. The jobless rate stood at 8.7%, a level not seen since January 2009.

Figures from Germany, the euro zone’s economic powerhouse also helped underpin support for the common currency. The country’s industrial production output rose 3.4% during November, the biggest jump since September.

US dollar lags behind despite improved consumer spending

The US dollar found itself at multi-month lows versus both the euro and sterling as buoyant consumer spending failed to prevent losses last week.

Retail sales rose 0.4% during December thanks to receipts at gardening and building material stores. Sales for the year rose 5.4% and with consumer spending accounting for two-thirds of economic activity suggests the US economy finished the year in good health.

Elsewhere, rises in the price of rental accommodation and healthcare saw consumer inflation prices posted their largest gain in 11 months last month.

Elsewhere

The Swiss franc dropped over half a cent against the pound last week as the country’s retail sector disappointed. In the year to November sales rose by just 0.1%. Retailers had expected a higher reading in light of an improving economy and a weaker currency.

The Canadian dollar failed to make headway versus sterling last week as the Canadian housing market showed signs of weakness. The number of building permits issued during November took a larger-than-expected fall due to fewer plans being submitted for both industrial and commercial buildings. The number of new houses being constructed also fell below expectations.

The Australian dollar lost over a cent against sterling by the week’s close despite a surge in the country’s retail sales. November’s sales jumped by their biggest monthly rise in four years thanks to Black Friday and the release of the latest iPhone.

The week ahead

Domestic highlights for the pound this week will include consumer inflation figures on Tuesday (9.30am), whilst retail sales figures will conclude the pound’s week on Friday at 9.30am.

US economic influences will include both manufacturing and industrial production data on Wednesday (2.15pm) with building permits data and new housing starts figures following on Thursday at 1.30pm.

In a relatively quiet week for domestic releases, Wednesday’s release of euro zone consumer inflation figures (10.00am) will headline the euro’s calendar. Construction output data will also be heard on Wednesday at 10.00am.

View UK, US and euro zone announcements with our economic calendar

Other key data releases:

Bank of Canada interest rate policy meeting (Wednesday, 3.00pm)

Australian unemployment data (Thursday, 12:30am)

Japanese industrial production data (4.30am)

South African Reserve Bank interest rate policy meeting (Thursday 1:00pm)

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