A stronger than expected UK Services Purchasing Managers’ Index reading meant the pound to US dollar rate hit the ground running on Monday, causing it to stride back above the 1.31 level. Britain’s dominant service sector was awash with optimism following Boris Johnson’s landslide election victory, which kicked Brexit uncertainty into touch – temporarily.
The government resumed its attempts to make Brexit happen on 31 January, when the Withdrawal Agreement Bill returned to the Commons on Tuesday. By Thursday it had been cleared to head to the House of Lords, with a majority of 99. This major milestone means the UK is on course to leave the EU at the end of the month, lending the pound some welcome support.
Wednesday saw new European Commission president Ursula von der Leyen travel to London for what turned out to be a positive first meeting with Boris Johnson. Unsurprisingly, the next round of Brexit negotiations was top of the agenda, with both sides expressing their optimistic hopes for the future. Upbeat rhetoric that will encourage investors in the pound.
The pound was having nightmares in the early hours of Thursday morning, however, when news emerged that retail sales fell for the first time since 1995 – when records began. The disappointing Christmas period for the retail industry saw the pound v dollar rate to dip below the 1.31 level briefly.
The pound ended the week in a more sluggish mood than it began it, after Mark Carney’s downbeat speech on Thursday. The outgoing governor of the Banks of England said the central bank was considering the merits of a “near-term stimulus” to boost the struggling UK economy. The GBP vs USD rate subsequently slipped back below 1.31, where it settled.
Disappointing Jobs Figures Weigh on Dollar
In contrast to the pound, the dollar began the week on the back foot, with investors unsure whether to pile into the safe haven currency while they monitored events in the Middle East. By Wednesday the dollar was back in favour, as geopolitical risk in the region mounted.
Economic data dominated sentiment towards the dollar for the rest of the week. Most notably, better-than-expected US services sector figures, which gave the dollar a leg up on Tuesday. And Friday’s influential Non-farm Payrolls report, which revealed that the US labour market capped off 2019 by adding just 145,000 new jobs in December – on the surface this number appears positive, but economists had forecast job growth of 160,000. While the unemployment rate held at a five-decade low of 3.5%.
The slow payroll growth was compounded by disappointing average hourly earnings in December, which rose by just 2.9%, below the 3.1% projection. This marked the first-time wage gains were below 3% on a year-over-year basis since July 2018. The uninspiring labour market figures helped the pound sterling to USD rate to edge back towards the 1.31 level on Friday.
What to Expect Next Week
The Withdrawal Agreement Bill will pass to the House of Lords for further scrutiny next week after the Commons voted 330 to 231 in its favour. It’s expected to be given a more challenging hearing, but peers are still unlikely to block its passage.
A busy day in the UK economic calendar on Monday is dominated by GDP, Manufacturing Production and Industrial Production figures. Wednesday’s Consumer Price Index and Friday’s Retail Sales figures will also be closely monitored by the investors in the pound.
A slew of influential US data – including Tuesday’s Consumer Price Index, Thursday’s Retail Sales Control Group and Friday’s Michigan Consumer Sentiment Index – will be overshadowed by the possible signing of the long-awaited phase one US-China trade deal, which Mr Trump claimed will happen on Wednesday.
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