Sterling recovers after Trump report, Eurozone inflation falls short

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31 March 2017

Auteur
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling rose off its one week low against the US Dollar on Thursday after a report released by CNBC suggested that US President Donald Trump was seeking new methods to go after countries that try to weaken their currencies.

T
he report released yesterday claimed that the Trump Administration was allegedly “assessing the scope of its power to penalize countries whose currencies it believes are undervalued”. This follows similar comments from the President’s Administration, including Trump himself a matter of weeks ago, that suggested they were uncomfortable with a strong Dollar. Trump’s apparently opposition to a strong greenback presents a fairly notable hurdle to Dollar strength and we wouldn’t be surprised to see the President try to further talk the value of the currency in the coming months.

Meanwhile, the Euro lost further ground against its major peers on Thursday morning, including the Dollar, after the release of a disappointing set of inflation data out of Germany. Consumer prices in Europe’s largest economy grew by just 1.6% in the year to March, lower than the 2% consensus and considerably below the multi-year high 2.2% recorded in February.

This morning’s Eurozone wide inflation data was also a massive disappointment. Headline inflation slowed to 1.5% in March, considerably lower than the 2.0% recorded a month previous (Figure 1). Core inflation also came up short of expectations at 0.7% although, with an underwhelming print largely priced in, the reaction in the Euro was limited.

Figure 1: Eurozone Inflation Rate (2014 – 2017)

This morning’s data will likely push back expectations that the European Central Bank is ready to signal its period of large scale monetary stimulus could be coming to an end. We think the central bank will need to see a prolonged bout of higher core inflation before they even consider altering the existing policy. So far we have seen no evidence of that.

Major currencies in detail

GBP

Yesterday’s report regarding the Trump Administration’s opposition to Dollar strength caused the Pound to end 0.5% higher against the greenback.

The UK’s Brexit minister David Davis spoke in London yesterday in what was a generally quiet day of economic and political news in Britain a day after the Article 50 trigger. Sterling bulls breathed a sigh of relief after Davis said he didn’t expect Britain to have to pay the £50 billion to the EU as part of the Brexit process that many media reports were suggesting.

Updated GDP data for the fourth quarter was revised downwards to 1.9% this morning. However, much like yesterday’s US numbers, the reaction in Sterling was limited given the data’s time lag.

EUR

The very weak inflation data out of Germany on Thursday more than offset the general sell-off in the US Dollar, with the Euro ending London trading 0.3% lower.

Business confidence data out of the Eurozone yesterday further soured sentiment towards the single currency. The business climate index from the European Commission unexpectedly remained unchanged at 0.82, versus the 0.86 consensus, while industrial confidence fell to 1.2 from 1.3.

ECB member Knot also reiterated the central bank had no reason to change its existing accommodative monetary policy, claiming that a tapering of its QE programme should only be brought forward if the economy performs better than currently expected.

USD

Driven primarily by broad Euro weakness, the US Dollar index rose by 0.2% during the course of trading yesterday.

Federal Reserve members Mister and Williams both added their names to the growing list of central bank members that have called for multiple interest rates hikes in the US since the FOMC’s March meeting. Williams claimed he saw 2-3 more hikes in the US this year with upside risks more prominent than they were previously.

Personal spending and income data out of the US this afternoon will round off a relatively quiet week in the US in terms of economic and political news. Normal service will be resumed next week with the release of the monthly nonfarm payrolls report.

DEEL