Sterling was volatile last week although bias was seen to the upside with Brexit negotiations the focus for investors.
The pound gained as it looked increasingly likely that a deal would be agreed but it was a case of ‘buy the rumour, sell the fact’ when the breakthrough was announced on Friday.
In a joint press conference, UK Prime Minister Theresa May and EU Commission President Jean-Claude Juncker announced that enough progress has been made to allow talks to move to the second stage, although according to DUP leader Arlene Foster, there is still some work to be done on the Irish border issue.
‘Super Thursday’ from the Bank of England this week where the monetary policy committee (MPC) are expected to leave interest rates unchanged. Although further rate hikes are forecast by the Bank over the next two years, markets will be looking for clues as to the timing of any future policy tightening in the minutes.
For the week, the pound gained 0.3% versus the Euro and 0.4% versus the Yen but lost 0.9% versus the US Dollar.
It was a quiet week for the Euro with investor focus elsewhere as Brexit negotiations and US tax reform efforts took centre stage. Comments from ECB Governing Council member Mersch took a hawkish tilt on Wednesday and offered some minor support.
Coalition talks between Merkel’s conservatives and the SPD party also appear to be moving in the right direction.
Data wise, Euro Zone year-on-year Q3 GDP was revised a touch higher, but retail sales were on the soft side.
The US Dollar strengthened against all the other G10 currencies last week with the Dollar Index adding 1.2 percent versus the prior Friday’s close.
The Greenback was on the front foot from the outset after the Senate passed the GOP tax reform bill after the market close on Friday. There is still some work to do to get a bill before the President, but House speaker Ryan said he was confident they will do so by December 25th.
On Friday, the House of Representatives also passed the short-term funding bill which would temporarily avert a government shutdown.
On the data front, US releases failed to have much of an impact early in the week as investors looked ahead to Friday’s jobs report which then promoted a choppy reaction. Although the headline non-farm payrolls figure was stronger than expected, average hourly earnings were soft and are becoming a major concern for the US economy.
The Japanese Yen weakened last week as a number of risk events produced successful conclusions and limited demand for safe-haven assets.
Domestically, comments from Bankof Japan Governor Kuroda prompted minimal reaction as he repeated the view that the central bank will continue “powerful” monetary easing.
Data wise, GDP surprised to the upside on Friday.
The Australian Dollar weakened last week, weighed by several key data misses. Retail sales fell short of expectations on Tuesday, as did GDP on Wednesday and trade figures on Friday.
The RBA policy decision meanwhile prompted minimal reaction as the cash rate was left on hold at 1.5%.
The Canadian Dollar weakened last week, taking a sharp leg lower on Wednesday after the Bank of Canada policy decision. The benchmark rate was left on hold at 1.00% as was widely expected but the statement also repeated that while higher interest rates will likely be required over time, the governing council will continue to be cautious – some economists had expected the BoC to take advantage of some stronger data releases of late.
NEW ZEALAND DOLLAR
The New Zealand Dollar was mixed last week although the bias was to the upside. We saw gains on Tuesday after RBNZ Governor Spencer said with inflation being persistently low, the RBNZ may need to think about whether it needs to tweak its approach to monetary policy.
The Dollar ended the week on the front foot as oil prices rebounded and Chinese trade figures surprised to the upside.
The Swedish Krone weakened last week although did see a brief spike after comments from Riksbank Governor Jansson were misinterpreted by investors. His initial comments that “substantial interest rate rises” are needed to address financial imbalances in the Swedish economy sent the Krone higher. Gains were paired swiftly however, and the Krone turned lower as the full text of his speech made clear he was still a long way from encouraging an end to the Riksbank’s loose monetary policy.
The Norwegian Krone was stronger on balance last week. Gains were made on Tuesday after the Norwegian Regional Network Survey noted that activity in the oil sector is no longer declining and that growth has been modestly higher than expected in the prior survey.
Manufacturing production data also surprised to the upside on Thursday.