Weekly Review February 20th
The main feature was strong US data and hawkish comments from Fed Chair Yellen, but the dollar struggled to take advantage, especially against the yen, as increases in US yields stalled and uncertainty dominated.
US CPI data was the highlight of the week with a stronger than expected 0.6% January increase, the strongest increase for close to four years. As energy prices increased strongly once again, the headline year-on-year rate increased to 2.5%, the highest rate since March 2012. Core prices rose 0.3% to give a 2.3% annual increase, maintaining expectations of higher inflation.
The US retail sales data was stronger than expected with a headline increase of 0.4% for the month and underlying gain of 1.0%, although sales were inflated by higher prices.
Fed Chair Yellen maintained expectations that the labour market would continue to improve and that inflation would rise to the 2% level. She continued to expect gradual increase in interest rates and also warned of the dangers in delaying a rate increase for too long as this would risk disruptive rate increases which could push the economy into recession.
The dollar pushed higher following Yellen’s comments and strong data, but was unable to sustain the advance.
Headline UK CPI inflation rose to 1.8% in January from 1.6% previously and this was the highest reading since June 2014, but fell short of consensus expectations of an increase to 1.9%.
Labour-market data was robust with a sharp decline in the claimant count of over 40,000 for the month, although this was distorted by changes to welfare policy and unemployment held at 4.8%.
Annual average earnings growth was weaker than expected at 2.6% from 2.8% the previous month and the retail sales data was weaker than expected for the second month running with sales volumes declining of 0.3% for January.
The data overall dampened expectations that the Bank of England would be forced to tighten monetary policy to curb inflation pressures.
Sterling weakened to the 0.8550 area against the Euro, but did find support below 1.2400 against the dollar.
Euro-zone fourth-quarter GDP growth was revised down to 0.4% from a flash estimate of 0.5% and the EU Commission remained generally downbeat surrounding the outlook, although the overall impact was limited. The 2016 current account surplus increased to EUR365bn and 3.4% of GDP from 3.1% of GDP in 2015.
French Presidential election opinion polls remained under close scrutiny and National Front leader Le Pen continued to lead in surveys of first-round preferences.
The Australian employment data was stronger than expected and commodity currencies continued to gain net support from higher prices for key commodity prices together with optimism surrounding the global growth outlook. The strong tone in global equity markets also boosted confidence in carry trades which lessened support for the Euro.
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