Sterling Slips After UK Economy Slows in First Quarter

Miltiadis Skemperis

Currency Solutions

The Pound has edged lower against the US Dollar after data showed that Britain's economy slowed more sharply than initially estimated in the first quarter. The Office for National Statistics (ONS) reported that UK's GDP was revised down to 0.2% in the three months to March from the first estimate of 0.3%.

The US Dollar is being supported by the expectation that the Federal Reserve is going to raise interest rates in June as the probability of the rate hike increases. In spite of tepid data releases, US Fed speaker Robert Kaplan said he expects two interest rate hikes this year. Kaplan thinks that more consumer spending and business investment will expand US growth up to 2.25% this year.

Pound Sterling – UK Markets

The British Pound is showing its strength and endurance, even in the aftermath of the suicide bomb attack in Manchester which killed 22 people. Market analysts said that financial markets have become less and less reactive to terrorist attacks in the recent years.

The UK government have raised the terrorist threat level to critical for the first time since July 2007. Home Secretary Amber Rudd told Sky News that citizens will see soldiers on the streets, in order to free up armed police officers for counter-terrorism operations.

Campaigning for the June 8 election is set to resume on Friday after being suspended due to the suicide bomb attack.

US Dollar – US Markets

The US Dollar has strengthened slightly but remained near 6½ month lows this week. It fell sharply on political fears about president Trump being impeached due to his ties with Russia, during and after his election. The Dollar is still down from the levels it spiked to after Donald Trump’s election, mostly because there’s diminishing hope that he will deliver on his promise of a fiscal boost.

The slight improvement in the Dollar’s exchange rate was due to the confidence of a “distinct” possibility of a June rate hike, according Federal Reserve (Fed) speakers. The Fed has indicated their unwillingness to surprise the market by changing their decision, in spite of the lack of strong economic data coming out recently.

The Fed has indicated that they believe the recently disappointing data isn’t part of a larger trend that shows the economy is slowing down. The dollar’s weakness in US markets is also being challenged by the rising Euro.

Euro – European Markets

The Euro is one of the best performing currencies in the world right now. Strong economic data regarding industrial output, low unemployment rates and strong product demand, seem to fuel the Euro’s drive upwards. Germany and France are leading the way, experiencing an economic resurgence and helping the Eurozone to grow at its fastest pace in the last six years.

Mario Draghi, who is the head of the European Central Bank (ECB), spoke in Madrid in a conference for financial stability, organised by Banco Espana. The Italian banker said that the macroeconomic environment in the Eurozone is improving, and that he sees no reason to deviate from ECB’s policies. Draghi added that, while negative rates have unwarranted side effects, these have been so far limited.

The ECB members will meet on June 8 in Tallinn, Estonia, to discuss the central bank’s policy. Germany is pressuring for the normalisation of the unconventional stimulus policies, despite Draghi’s opinion on the subject.

Other Currencies – Highlights

The Australian Dollar struggled against the Pound, on news of China’s downgrade by Moody’s, which is a US-based bond credit ratings agency. The Aussie was affected because China is Australia’s biggest export market, and Australia is the second most popular location for Chinese direct investment. Both countries are mutually dependent on each other from a supply and demand point of view. The release of Australia’s March quarter GDP report, expected in early June, is awaited with great interest.

The New Zealand Dollar evaded the shocking news coming from China, unlike its Australian counterpart. While the Kiwi is also a commodity-based currency as the Aussie, strong economic data indicating the economy’s resilience, seem to have protected it from slumping. Finance Minister Steve Joyce is going to present the new government budget. Joyce and prime minister, Bill English said that the budget will be focused on public services and infrastructure, debt reduction and “the opportunity to do something for family incomes.”

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