A change of fortunes this week with the British pound gaining ground against the single currency as the week progressed.
Bank of England Governor Mark Carney was keen to share his view on the UK’s current position and future prospects during his Economic Affairs Committee speech. He made strong reference to the negative economic implications should the outcome of the UK’s EU referendum vote be Brexit.
Carney indicated that the Bank of England still has room for conventional monetary measures, which may be called upon should UK economic conditions flounder after a Brexit outcome, although there is no appetite at all to dip into negative rates territory within the Bank of England’s Monetary Policy Committee. So the message is clear, interest rates in the UK could be tweaked below the current 0.5% level. No doubt opinion poll releases in the run up to the poll date of the 23rd of June will hold sway for sterling.
UK’s unemployment rate was released on Wednesday with the outcome unchanged at 5.1%, its lowest level since before the financial crisis. There are now 22.9 million people working full-time in the UK, 289,000 more than a year earlier. The pound was little changed as at the same time average weekly earnings data saw wages climb by just 1.8% - hardly runaway inflationary pressures as a consequence of a tighter labor market.
UK retail sales continued its impressive run of improving conditions. March 2016 retail sales by volume increased by 2.7% when compared to the same month a year ago. Sterling climbed higher on this release in spite of Brexit concerns. Sterling/ Euro having started the week at €1.25 made it as high as €1.2750 at one point.
From the Eurozone the single currency was unable to benefit from an uplift in German Investor confidence as measured by the ZEW expectation index. Confidence rose for a second month taking the reading to its highest level this year at 11.2 for April, up from 4.3 reported in March. The recent rebound in global equity markets, further European Central Bank (ECB) stimulus measures to help support growth and improving economic conditions in China have helped rally current sentiment, although Brexit fears are never far from the minds of German respondents, with changes in UK opinion polls likely to sway near term views.
Italy’s banking authorities have made it clear that much needs to be done to help shore up the Italian financial system. Prime Minister Matteo Renzi continues to impose reform measures aimed at making Italian banks financially safer and less likely to fail or to spread contagion. With €360 billion worth of doubtful loans burdening the Italian banking system the need to finalize a new funding plan, and to take steps to deal with non-performing loans as soon as possible, is a major concern for the EU as well.
The ECB decided to keep all key interest rates unchanged at the April meeting as was widely expected by market consensus – triggering short-term volatility.
The Bank is still clearly concerned about inflationary developments and ensuring low inflation doesn't become entrenched. There was little new in the press statement to suggest that the ECB was contemplating any further measures, although a spat with Chancellor Angela Merkel following Germany’s criticism of the ECB’s low interest rate policy does not paint a picture of harmonious EU accord.
ECB president Mario Draghi was quick to counter any disparaging German remarks, insisting the ECB does not take orders from politicians. Any challenges to the ECB’s independence would dent confidence in the Eurozone’s recovery.
The single currency traded lower having initially spiked as high as $1.1399, only to drop back down to $1.1250 against the US dollar. The Dollar was also stronger following the news that America’s jobless claims had fallen to the lowest level since 1973, further underpinning confidence that the US economy remains well positioned to grow throughout 2016.
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