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Is Sterling Undervalued? – 6th February 2017

Is Sterling Undervalued? – 6th February 2017

It wasn’t a great end to last week for Sterling; on Thursday is fell due to the Bank of England Governor Mark Carney while on Friday the fall was due to the services sector of the UK economy. Since Thursday’s open, Sterling has dropped by an average of 1.5%.

Back to Thursday and the Monetary Policy Committee decision, as expected, kept interest rates unchanged at 0.25%. Mark Carney though went on to introduce the quarterly Inflation Report which, in essence, is forecast to overshoot its 2% target but the MPC will do nothing about it. Sterling dropped on these comments as the markets had hoped for something a little more hawkish.

Investors studied the Governor’s observation that Sterling had been trashed since the referendum, even though the economy is performing better than expected and Britain is still in the EU. Mr Carney came within an inch of saying that the selling has been overdone and Sterling is undervalued but by saying nothing, Sterling went south.

The purchasing managers’ indices (PMI) for the services sector in Germany and the Eurozone were lower than the equivalent UK figure but they were better than expected, while Britain’s reading fell short of forecast. The services sector PMI had been expected to be about half a point lower on the month at 55.8. In fact it came in at 54.5, well short of forecast. Even though the figure was better than Germany’s 53.4, France’s 54.1, Italy’s 52.4, Spain’s 54.2 and the Eurozone’s 53.7, investors were more concerned that it was below forecast.

America’s two services PMIs came in at 55.6 and 56.5. They, too, were a touch lower than expected. However, investors were more interested in the jobs numbers that had come out an hour or so previously. US non-farm payrolls comfortably beat forecast, rising by 227,000 in January, but a downward revision to November’s number wiped out all but 13,000 of the excess and the 0.1% monthly increase in average earnings looked miserable.  As in Britain, slow earnings growth in the US is seen as an obstacle to economic growth and higher interest rates.

Last week the White House said the euro was “grossly undervalued”. Yesterday Wolfgang Schäuble, Germany’s finance minister, said in an interview that the Euro is too low and that it is the fault of ECB monetary policy. The European Central Bank president will be appearing before the European Parliament’s Committee on Economic and Monetary Affairs (ECON) this afternoon. The Euro’s performance will depend on how vehemently Mario Draghi defends a one-size-fits-all monetary policy that is supposedly inappropriate for the EU’s biggest economy.