FX round-up: Sterling hit by weak data, US dollar strength

11 February 2019

(Sharecast News) - Sterling was under pressure on Monday, dragged lower by a spate of weak data out of the UK even as the US currency found a bid against the other majors ahead of a key week for US-China trade talks.
According to the <em>Office for National Statistics</em>, the quarterly rate of expansion in the UK's gross domestic product slowed from 0.6% over the three months to September to 0.2% in quarter four.

The data was punctuated by monthly GDP figures for December that revealed greater-than-expected month-on-month falls in services and construction of 0.2% (consensus: 0.0%) and 2.8% (consensus: 0.1%).

But for now at least, economists' concern was limited, with <em>Pantheon Macroeconomics</em>' Samuel Tombs saying: "We have revised down our forecast for quarter-on-quarter GDP growth in Q1 to 0.2%, from 0.3%, due to the lower-than-expected starting point in December. We also have nudged down our forecast for year-over-year GDP growth in 2019 as a whole to 1.5%, from 1.6%. But we're not prepared to bet against consumers at this stage, given their track record of resilience and myopia."

Against that backdrop, as of 2137 GMT, the US dollar spot index was climbing 0.43% to trade at 97.0560, hitting its highest level in two months during the session.

In parallel, cable was off by 0.57% at 1.28611.

Euro/dollar was softer as well, slipping 0.41% to 1.12762.

There was little by the way of fresh economic data out of the single currency bloc on Monday, but analysts at <em>Morgan Stanley</em> did weigh-in with a rather dour outlook.

"We no longer see the economy gradually reverting to trend, core inflation rising visibly and the ECB hiking the depo rate this October, with two extra hikes next year to both the depo and the refi rates," the investment bank's analysts said.

"We now forecast subtrend growth for some time, a pause in the rise of core inflation and, therefore, a later start of the ECB rate lift-off, in mid-2020."

China's yuan was also weaker, with the Greenback gaining 0.70% to 6.7923 against the Asian currency.

Data released overnight showed China's FX reserves increasing from $3.073trn for December to $3.088trn in January (consensus: $3.080trn).

"These data suggest a moderation in capital outflows in January, assuming a small decrease in the trade surplus," said Freya Beamish at <em>Pantheon Macroeonomics</em>.

"For now, outflow pressures have eased, partly thanks to the Fed's dovish turn at the start of the year. But we anticipate two rate hikes from the Fed in the second half, so China's capital outflow pressure should rebuild around the middle of the year as hike expectations re-emerge, and China's central bank continues easing in the first half."

Earlier, junior officials from the US and China had kicked-off the second round of trade negotiations between Beijing and Washington, with the tempo possibly set to pick-up towards the end of the week, on Thursday and Friday, as senior officials from both sides joined in.