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Posted by portugalpress on March 16, 2018

Chancellor Hammond gave an upbeat spring statement this week and the pound enjoyed some of its best levels against the euro and the dollar in six months. In his statement, he reassured parliament that the budget is under control at last and the OBR has upped its estimates for UK economic growth in the coming five years to 1.5%, 1.3%, 1.3%, 1.4% and 1.5%. An ominous drama unfolded after Theresa May announced that 23 Russian Diplomats would be expelled from the country after the use of a nerve agent. The pound wavered on the news from Visa that spending on its credit cards fell 1.1% in February and that the first quarter of 2018 could be the "worst on record" caused a dip. It took more political support, this time in the form of one of David Davis's lieutenants who spoke optimistically about a Brexit transition arrangement with the EU. Robin Walker told the Institute of Directors "I want to stress that we are very close to a deal" for the pound to recover. For the most part, all eyes are turning to the Bank of England MPC meeting next week and a European Union leaders’ summit where the UK is set to announce a deal on its relations with the bloc post-Brexit.

German CPI hit forecasts, but Industrial Production data missed targets. After the European Central Bank dropped some key wording regarding the future of monetary policy - with inflation forecasts for 2019 revised lower and 2018 GDP growth revised up to 2.4%, - ECB President Mario Draghi made it clear this week that the ECB would continue to be reactive to the situation. His message for the ECB Watchers conference in Frankfurt was that that there should be more evidence that inflation is moving towards to the goal to bringing net asset purchases to a gradual end. He said the ECB would be looking for “sustained adjustment in the path of inflation towards our aim,” prior to making any major changes and in the meantime, “monetary policy will remain patient, persistent and prudent."

Despite a raft of ecostats emerging from the US, it is political intrigue that has been holding most influence over the US dollar. Nonfarm payrolls leapt 313k, the biggest increase in three years, and wages slowed to 2.6% but this had little impact - investors had been expecting a decent US employment report and they got one. The 2.6% annual wage rise more than compensated for the 2.2% increase in consumer prices. Inflation came in exactly in line with forecast, with the headline rate at 2.2%. There was a poor performance from American retailers in February, while producer price inflation surprised on the upside for the month. Headline retail sales fell by 0.1% during February, deepening the 0.3% contraction seen in January, when markets had expected a 0.3% rise. Core retail sales grew by a lowly 0.2% when markets had anticipated a stronger recovery after January’s showing of 0% growth. Speculation that North Korea might ditch its nuclear weapons knocked the dollar back, as did Mr Trump's escalation of trade tensions and Gary Cohn's resignation. Close on the heels of Mr Cohn’s departure was the very public firing of Secretary of State Rex Tillerson; share prices and the US dollar were marked down following the news, perhaps not only because it followed so closely from Cohn’s departure but because investors were concerned about the appointment of Michael Pompeo, who is said to be ideologically aligned with the president on trade and foreign policy and adds fuel to the fear of a trade war. A victory for the Democrats in a special election held in a previous Trump stronghold in Pennsylvania is being considered as an indicator for the outcome of the midterm elections in November. Predictably, the Republicans are seeking to brush it off whilst the Democrats intend to seize the momentum.

The Canadian dollar was hindered by the rumblings of a trade war with the US, particularly around rewriting the NAFTA treaty in the United States' favour. The Loonie was not helped by Governor Poloz’ observation this week that younger people are under-represented in the labour market. This cast doubt on the idea that full employment is within reach which in turn, made the Bank of Canada's appetite for higher interest rates seem more uncertain.

While most countries struggle to find good news amongst the stats, Australia released some strong stats. The pound slumped -0.7% against the Aussie after the Westpac consumer confidence figures provided a mild boost after revealing a 0.3% uptick in the index from 102.7 to 103.0 points, although this still leaves sentiment well-below January levels thanks to the 2.3% drop recorded in February. Chinese industry figures showed stronger-than-expected rates of industrial production during February and gave the Aussie a further boost. On a year-on-year and year-to-date basis, industrial production grew 7.2% last month, accelerating from 6.6% in January against forecasts of a slip to 6.2%. This bodes well for Australian exports, as rising factory activity in China suggests that demand for Australian iron ore was likely to have increased last month and could carry over to this month as well. Coupled with strong stats, the Australian dollar also received support from a speech made by Reserve Bank of Australia (RBA) Assistant Governor of Financial Markets Christopher Kent which predicted an increase in potential inflationary pressures worldwide, possibly signalling monetary tightening on the horizon for Australia. However, the Australian dollar can’t rest on its laurels down under; high-impact growth data from New Zealand could lose ground – to the benefit of the pound -by making the Australian Dollar a less-appealing high-yield asset than its Antipodean cousin the New Zealand Dollar. In addition, both the Australian and NZ dollars are vulnerable to the looming prospect of renewed trade tensions.

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