Political jousting ahead of trade talks weighs on pound
A barren week in the UK economic calendar meant that the pound was taking its cues from developments in the build-up to the UK-EU trade talks, which are scheduled to kick-off on 2 March. Having briefly dipped below the 1.29 level on Monday, the pair found solace in the approval of the EU’s mandate for negotiations by its General Affairs Council on Tuesday.
By Wednesday, however, the mood had changed after the EU’s chief negotiator, Michel Barnier stoked tensions between the two sides. Having told Boris Johnson that the bloc won’t agree to a trade deal “at any price”, he then dashed the PM’s hopes of securing a Canada-style deal.
UK officials hit back on Thursday, by warning the EU that they will walk away from trade talks in June unless there is a “broad outline” of a deal; a hard-line stance that put a no-deal firmly back on the table, causing the pound to US dollar rate to slip below the 1.28 level.
Friday’s GfK consumer confidence index was the only economic release from the UK worth paying much attention to last week. However, trade talk headwinds overshadowed news that sentiment towards economic activity – which remains in negative territory – increased for the third month in a row in February.
Odds of Fed rate cut rise
The dollar was continuing to experience a surge in demand at the start of the week, as risky assets were ditched in favour of its safe-haven status amid the rapidly spreading coronavirus outbreak. However, it wasn’t long before market clamour grew for the US Federal Reserve to cut interest rates to stem the economic damage from the epidemic. These voices were muffled on Tuesday by Fed Vice Chair Richard Clarida, who said that it’s still too soon to gauge if a change in monetary policy is required.
By the end of the week, it was clear investors firmly believe the coronavirus will force the Fed’s hand, despite comments to the contrary from officials. According to CME Group’s FedWatch, they were pricing in around a 76% chance of the central bank starting to cut rates as soon as March.
Britain and the EU will kick-off the much-anticipated post-Brexit trade talk process in rather acrimonious fashion on Monday after both sides fired warning shots during the week. However, these are still early days.
Dollar investors will continue to monitor the impact of the coronavirus outbreak on the economy for further signs that the Fed could be forced to cut interest rates soon.
Monday’s Markit manufacturing PMI reading kicks off another quiet week in the UK economic calendar, which also includes the Markit services PMI on Wednesday. A much busier week over in the US includes the ISM manufacturing PMI on Monday and the ISM non-manufacturing PMI on Wednesday; but it’s Friday’s influential nonfarm payrolls figure – which is forecast to fall – that will draw the most attention.
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