February was another volatile month for our major pairings. Sterling-euro fell to its lowest level since December 2014, while Sterling-dollar fell to its lowest since 2009. Pound weakness was intensified by London Mayor Boris Johnson’s support for a Leave vote. At the same time, the dollar received some support last month from a batch of positive data, including above-forecast Retail Sales, Durable Goods Orders, inflation, wage growth, and employment data. Euro data were more mixed, and ECB comments left the door open for further easing in March. This month, markets will keep an eye on central bank meetings, as well as the latest inflation, wage, and unemployment figures.
February was another volatile month for the pound, which fell to new lows against both the dollar (1.3835) and the euro (1.2610). One of the main contributors to Sterling weakness this month was the UK’s upcoming EU Referendum. The pound strengthened on a Friday as Prime Minister Cameron and other EU leaders reached a deal following the culmination of negotiations, only to erase those losses on Monday after London Mayor Boris Johnson voiced his support for a Leave vote. The pound proceeded to tumble against its main currency pairings for the rest of the week. The economic calendar provided the pound with little support, after an initial increase in Manufacturing PMI. The BOE voted unanimously for the first time since July to hold interest rates at 0.50% as MPC Member McCafferty withdrew his call for a rate hike. Annual inflation ticked up to 0.3% as expected while Core annual inflation slowed to 1.2% from 1.4%. Average Earnings growth slowed to 1.9% as forecast, while the Unemployment Rate unexpectedly held at 5.1% instead of falling to 5.0% as forecast, although this remains the lowest levels of unemployment since 2005. Retail Sales were another bright spot on the economic calendar, jumping up 2.3%, while the second estimate of Q4 GDP growth was unchanged at 0.5%.
Brexit concerns will continue to pose a risk to Sterling strength in March and may lead to volatility in the pound over the coming months. Disappointing PMI figures kicked off the month’s releases, but despite lower-than-expected releases, the pound recovered some ground from its recent lows. Whether it is able to maintain any gains is another question and will likely depend on the extent to which Brexit concerns remain in focus and the results of the month’s releases. The BOE will release its next interest rate decision on 17 March. Markets will pay close attention to the BOE’s guidance at the time. Inflation, wage growth, employment, and economic growth will be among the month’s key figures as markets look for any relief following a volatile start to the year, as well as for signs that the UK’s economy remains on track despite the financial market turmoil that began the year.
With no ECB meeting in December, the data calendar overall had a slightly quieter month. Central bank comments kept open the possibility of further easing in March, with the ECB reiterating that it is prepared to do whatever is necessary to fulfil its mandate and support the economy. At the same time, it is considering the impact that any further measures it considers will have on banks. Data out last month were mixed, and annual CPI remains well below the ECB’s 2% target rate. Economic Sentiment fell in both Germany and the Eurozone as a whole, while Flash Manufacturing and Services figures from France, Germany, and the Eurozone largely disappointed, with the French Services index indicating industry contraction. Preliminary GDP figures indicated growth of 0.3% in both Germany and the Eurozone as a whole. The Unemployment Rate in the Eurozone fell to 10.3%.
As inflation remains low, markets have speculated that the ECB might expand stimulus at its March meeting, particularly following comments from the ECB affirming that it will do whatever is necessary to achieve its mandate. Whether the ECB does ease further and the degree of any stimulus announced remains to be seen. The ECB meeting, on 10 March, could be the month’s main event, setting the course for euro strength or weakness over the coming months. In addition, markets will continue to keep an eye on the latest inflation figures, as well as Manufacturing and Services PMI, Economic Sentiment, and German Business Climate and Retail Sales.
The dollar made gains against both the pound and the euro last month. Highlights included above-forecast wage growth and a drop in the Unemployment Rate to 4.9%. Retail Sales rose slightly more than forecast, and Durable Goods Orders returned to growth, rising significantly more than forecast. While there was no Fed rate-setting meeting in February, markets looked for signs as to the Fed’s likely movement in March. Although recent financial market volatility has increased the global risks to the US’s outlook, there were some tentative signs of an increase in inflation, with Core CPI m/m and annual CPI figures up more than expected. Fed members remain divided on the extent to which the increase in global risks might impact the path of the Federal Funds Rate going forward. Disappointing releases included Consumer Sentiment, Consumer Confidence, and certain housing figures.
Ahead of the March 15 Fed meeting, markets will keep a close eye on the jobs report out on 4 March and any Fed comments. An improving labour market has been one of the factors supporting the decision to raise interest rates, so further strong such figures could continue to support the argument for raising rates despite the increase in global risks. Last month’s figures saw an above-forecast increase in wage growth; markets will look for whether that was a one-off or start of a trend of higher earnings growth. On that same note, markets will also look for any additional signs of a pick-up in inflation from this month’s CPI figures. Should these figures continue to improve, the Fed may signal its intention to continue raising interest rates, although rate increase as soon as March remains less likely than before the financial market volatility.