It was a funny old week for currencies. Having begun with investors taking refuge in the safe-haven Swiss franc, yen and euro, the game moved on to a tighter focus on the Turkish lira, the South African rand and the Russian rouble, all of which received central bank support of one sort or another. As the week drew to a close investors were rediscovering at least a little of their confidence but there was no clear pattern to the currency winners and losers. The euro was unchanged against sterling but down by a cent and a half against the US dollar. It was nearly three cents weaker against the Australian dollar and up by about one cent against the NZ dollar. The euro lost half a cent to the Swiss franc. A one-word summary of the week’s mood would be “confusion”.
In the euro area Germany reported improved consumer and business confidence as well as a second consecutive month of falling unemployment. Inflation there ticked lower to 1.3% and in Euroland it fell back to the 0.7% level that so upset the euro’s applecart two months ago. For Euroland as a whole the official EC figures showed improved confidence among consumers and investors but industrial firms were less optimistic. Euro zone unemployment provided the best news, falling from 12.1% to 12%. But none of the euro zone data was of huge importance and only the lower inflation rate had any noticeable impact on the euro itself.
The UK economic data did almost all that was expected of them but they, too, were unexceptional. The first stab at UK gross domestic product (GDP) in the fourth quarter of 2013 showed the economy expanding by 0.7% over the three months. Because that number was exactly in line with analysts’ forecasts it did the pound no particular favours, respectable though it was. Sterling was also damned with the faint praise of December’s small increase in mortgage lending; investors had been hoping for more. When Bank of England Governor Mark Carney gave a speech explaining why an independent Scotland ought not to retain currency union with Britain he avoided saying anything to depress the pound other than to remind everyone that UK interest rates would remain low for a long time.
The US data were equally unremarkable. The only figure that really mattered was the 0.8% expansion of GDP during the fourth quarter. It was fractionally faster growth than in the UK but no better than investors had been expecting. There was no real surprise at the Federal Reserve’s announcement that it would be cutting another $10bn from the amount of money it prints every month, bringing the number down to $65bn, but investors still saw the decision as a positive for the dollar.
In the week ahead the focus will initially be on the monthly round of purchasing managers’ index readings, which indicate whether private sector firms are doing more or less business. With those out of the way attention will turn on Thursday to the policy decisions of the Bank of England and the European Central Bank. No change is expected from the BoE but there is a suspicion that the ECB might feel the need to do something about Euroland’s stubbornly low inflation rate: 0.7% is well below the 2% target.
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