Week Commencing Monday 13th March 2017
US: To hike or not to hike ... is it even a question?
After strong US jobs data on Friday, there is a strong feeling in currency markets that the US Federal Reserve will raise interest rates on Wednesday.
The rate increase expected on March 15 will be the second in four months, a pace unseen since the peak of the US housing boom in 2006. A rate hike will also bring the Federal Reserve's target rate to between 0.75 - 1.00 percentage, near the bottom of the range within which the Fed operated before the 2007-2009 crisis.
US jobs growth has also been a catalyst, with a survey revealing that 298,000 private sector jobs were created in February, dwarfing the 187,000 that markets expected. Despite the market expecting a rate rise, we still expect significant currency movements on the back of any policy shift.
With the Greenback already trading strongly versus most majors, we expect a take no prisoners attitude and for further Dollar gains as we draw closer towards this middle of the month.
UK: Article 50 here we come!
With Article 50 potentially being triggered this week, all focus is once again on the plight of poor old Sterling.
Sterling is, however, considered relatively cheap given the underlying health of the UK economy. While this presents a buying opportunity for some, the situation is more complex than most! Potential issues, especially in the medium term, continue to surround the health of Corporate Britain.
There is then the risk of inward investment into the UK post Article 50 and Brexit dries up, while the ongoing political relationship between the UK and EU. Sterling is not just susceptible to UK derived shocks, we could see further movements given the improving state of the European economy. Meanwhile, Marine La Pen losing the French presidential election and/or a dovish European Central Bank would all add further pressure.
Sterling post-Brexit declines are not a guarantee, especially given how fluid the situation is. All we do know is that we are in store for an interesting couple of years!
EUR/USD will likely trade the FOMC this week, with an interest rate hike likely to push the pair closer to parity. This, coupled with the potential triggering of Article 50 from the UK could be a bit of a double whammy for the single currency. Should either of these events be triggered, expect declines to touch the 1.04 Euro support level. Declines beyond this point could push to parity.
GBP/USD is going to have a big week! With the FOMC potentially putting rates up and the triggering of Article 50 (in addition to the potential of an announcement of a second Scottish Independence Referendum), a drop through 1.20 does not seem impossible. Should we see one of these geo-political events occurring, expect Sterling to be hit hard.
As with GBP/USD, we expect Sterling to be hit hard versus the Euro on an Article 50 trigger. The rate has been declining for some weeks now, with 1.11 firmly in sight as a worst case scenario. Risk remains to the downside, even if A50 is not triggered, so expect a test of 1.13 as a minimum.
Economic Calander for the Week
We have a busy week for the UK on the economic calendar front, however all eyes will be on parliament and whether article 50 will get royal assent or not this week. Outside this, we have the Claimant Count on Wednesday which is expected to decline further by 5,000. Thursday sees the Bank of England rate decision and MPC minutes. We expect no shift in monetary policy from the bank, however if Article 50 has been triggered expect some comment from the bank to sooth markets.
We expect the Federal Reserve to increase rates this week, so expect most news wires to focus on Janet Yellen. Outside this, we expect retail sales to decline slightly on the month to 0.1 percent from 0.4 percent in January. Building Permits should come in roughly in line with 1.260 million units in the month. The Philadelphia Fed manufacturing Index is poised to decline markedly from 43.3 to 30.0 while Job Openings should decline to 5.450 million.
Eurozone inflation is the star of the European week, with a 2 percent print widely expected. Mario Draghi is speaking on Monday, and as per usual expect any policy hints to effect Euro prices for the week.
Week Commencing Monday 6th March 2017
UK: Spreadsheet Phil in the house!
It’s that time of year again for number 11 Downing Street, with this year’s Spring budget not only the last but most anticipated budget in years.
This will be the last time we see a budget release at this time of year, after Philip Hammond decided to move the announcements to the Autumn Statement instead. Despite its “grand finale”, we expect Philip, who has become known as Spreadsheet Phil, to air on the side of caution this year. He is expected to say that economic growth has been, and will be, stronger than expected after the Brexit vote.
The picture for the public finances is also looking rosier compared to his maiden autumn statement in November. Back in mid 2016, the OBR forecasted that the impact of Brexit would force the government to borrow an additional GBP 122 billion more over the coming years, however less than four months on, healthy tax receipts has meant the government has not borrowed anywhere near the figure.
Despite the surplus in funds, it is unlikely that Hammond will make the same mistake as Osbourne and spend the lot, only to ask for it back in the following statement. We expect a pragmatic budget which contains a reasonable number of minor tax hikes, whilst offering little relief. It is in the governments interests to baton down the hatches now, in anticipation for what could be a very long and protracted negotiation with the European Union.
EZ: Eurozone inflation hitting the roof!
Eurozone inflation has risen above the European Central Bank's (ECB) target rate for the first time in four years.
The year on year rate of inflation rose from 1.8 percent in January according to flash estimates from the European Commission. The sharp rise over the months since November has mainly been driven by the growing costs of energy and food.
This has been compounded as Brent crude oil prices are now hovering around the USD 55 a barrel point, up from lows of USD 44 per barrel in November. February was the third straight month the rate rose higher than expected, however core inflation, which does not include volatile prices such as energy and food, was stable at 0.9 percent, having last risen in December from 0.8 percent.
The ECB is still actively engaged in a massive quantitative easing programme, designed to boost liquidity and inject some inflation into the Eurozone economy. As things stand, the Bank intends to reduce its bond purchasing activities from EUR 80 billion to EUR 60 billion a month from next month, but will continue the programme until the end of the year at least.
The program certainly seems to be boosting headline inflation, however the expected growth numbers appear to remain allusive. It’s a tough job in Frankfurt, but someone’s got to do it!
NORTH KOREA: What next ... Nuclear Armageddon!
The Japanese Yen jumped markedly in the Asian session Monday morning as risk aversion floods the market.
This comes as North Korea fired four ballistic missiles into nearby waters early morning, further demonstrating the unpredictability of Kim Jong Un’s leadership. Pyongyang has staged a series of missile tests of various ranges in recent months, including a new intermediate range missile in February, while also conducted two nuclear tests last year.
The ramped up tests come as Kim Jung Un pushes for a nuclear and missile program that can deter what he calls US and South Korean aggression towards the north. The Nikkei responded by trading down around -0.5 percent, and is expected to trade in the red for the whole session.
The Yen surged as risk off took hold, with GBP/JPY pushing below 140 in early morning trading. Kim Jong Un is not going away, and as the situation continues to escalate fears are mounting of an armed skirmish.
Sterling will remain susceptible to both economic and political shocks on Budget week. Expect solid and pragmatic policy and/or fiscal announcements to give Sterling a boost. Manufacturing production however will likely cause a drag, as will ongoing Brexit fears. As such expect Sterling to continue to edge down this week with 1.22 and below in sights for Cable. GBP/EUR is more interesting with the ECB, however 1.14 – 1.15 seems feasible.
The Greenback has had a strong week, and with more growth policies coming out of the Trump machine every day we do not expect this to change soon. A drop in Unemployment should give more power to the Dollar, with EUR/USD potentially pushing below 1.05.
The Euro remains mixed with the Dollar overpowering and Sterling lacklustre. The ECB should provide some much needed relief for the single currency this week, especially as inflation continues to rise. Rates can only go one way, and any hint of either a reduction in QE or a rake hike will send the Euro into the stratosphere.
Economic Calander for the Week
We have a reasonably quiet week on the economic data front with Manufacturing Production the only economic release of note. We expect the figure to come in below 0, indicating a decline in the sectors performance for January, therefore expect some negative headlines regarding this on Friday. The Budget on Wednesday remains the highest political risk of the week, with many surprises expected. It is unclear how the budget will effect sentiment, however expect a volatile day.
We also have a reasonably quiet week for the US, with ADP Nonfarm Employment Change kick-starting everything on Wednesday. We expect the change to decline to 190k from 246k previously, however expect little in the way of market movement. Crude Oil Inventories should remain stable at 1.501M barrels. Moving to Friday, Nonfarm Payrolls should come in at 190k while the Unemployment Rate could drop by 0.1 pp to 4.7 percent.
In the Eurozone we have the all-important ECB meeting on Thursday, which should dominate the European economic calendar. We do not expect any shifts in monetary policy from the bank, with the deposit rate and headline interest rate remaining at -0.4 percent and 0.0 percent respectively. The press conference will be more interesting where Draghi’s comments on raising Eurozone inflation and Brexit will likely be the main drivers.
Week Commencing Monday 27th February 2017
GERMANY: All the money in the world!
Germany’s budget surplus, the largest in Europe, has got bigger despite Eurozone and Brexit woes as the country continues to dominate Europe.
The surplus hit an almost two decade high at EUR 24 Billion, according to the country’s official statistics agency, while its end of year GDP growth overtook the UK’s, making it the fastest growing G7 economy in the fourth quarter. According to agency figures, the country’s pension funds saw the largest surplus at EUR 8.2 Billion, followed by the central government at EUR 7 Billion. The state government recorded a EUR 4.7 billion surplus while locaBusy wl government saw a EUR 3.1 billion.
German states have been cutting spending and raising taxes for years in a bid to comply with the rules of Germany’s debt brake, which requires states to completely eliminate any underlying deficit by 2020. Angela Merkel played down the size of the federal government's portion of the surplus, which will go into a fund for refugee-related expenditure following the influx of people, however political pressure is mounting.
Many believe that the surplus should be re-invested in productivity focused scheme’s, while Eurocrats believe the level of surplus is holding back other European countries.
UK: GDP edges up as Post-Brexit Britain continue to defy expectations.
Moving to the UK, Gross Domestic Product increased by 0.7 percent, up from the 0.6 percent initially forecasted in the preliminary print.
The data was closely watched as Q4 was just the second full quarter of activity after Britain's historic vote to leave the European Union. UK GDP has now grown in 16 consecutive quarters and has now comfortably surpassed its post-financial crisis low in 2008.
As with the first preliminary reading, the data showed that growth in the quarter was once again largely driven by a robust services sector, which grew 0.8 percent from the previous three months. Services accounts for roughly 80 percent of all GDP. Therefore, when it performs strongly, the economy tends to perform well too.
FOMC: Rates on the up, sooner rather than later.
Federal Reserve officials stated they are confident they can raise interest rates gradually, while a hike “fairly soon” might be appropriate to avoid the risk of an overheated economy, according to minutes of Federal Open Market Committee’s latest meeting.
In December, the Fed forecast it would raise rates three times in 2017 and so far robust readings on the economy have bolstered the confidence of many policymakers. Set against that is continued uncertainty over the new Trump administration's economic plans, with Federal Reserve policymakers awaiting details in order to assess how the policies would affect the economic outlook.
Another concern for the Federal Reserve is its balance sheet, which has ballooned to roughly USD 4.5 trillion from just below USD 1 trillion during former President Obama's eight years in office.
EUR/USD dipped to 1.0493 last week but quickly recovered. Initial bias remains neutral this week, however with the 1.0713 level of resistance remaining intact, we expect the trend to continue to point south throughout the week. With US data the driver this week, expect Yellen’s comments on Friday to be the chief driver of EUR/USD demand.
GBP/USD remained bounded in range of 1.2346/2705 last week. Initial bias remains neutral this week, however Sterling remains extremely susceptible to Geo-political price moves, especially as we draw closer to Article 50 being triggered. Expect this and/or news of an impending ScotNat Referendum to be key Sterling negative events when they happen. We expect rangebound trading this week, with Cable likely to push as low as 1.23.
GBP/EUR jumped and touched 1.1901 this week as Sterling was boosted by solid UK economic data. As above, our view is neutral and the pair should trade within its range, however as we draw closer to the PMI releases we expect Sterling to continue to sell off. Expect the pair to trade between the 1.16 to 1.118 range this week, with poor PMI releases to push the pair lower.
Economic Calander for the Week
In the UK we have the all-important PMI releases, starting with Manufacturing on Wednesday. We expect the print to come in slightly lower from 55.9 to 55.5, indicating a slowdown in expansion. Construction on Thursday is expected to expand slightly on the month, pushing the print up from 52.2 to 52.4. Finally, Services PMI on Friday should show a minor decline on the month from 54.5 to 54.2. As per usual, Brexit related geo-political news will be Sterling’s key driver.
We have a busy week for the US, with Core Durable Goods and Pending Home Sales kick starting the week on Monday. We expect the Goods figure to come in at 0.5 percent, while Home sales should decline on the month to 0.8 percent. US GDP for Q4 should see growth increase to 2.1 percent from the initial 1.9 percent print. ISM Manufacturing PMI on Wednesday should come in as expected at 56.0, while the Non-Manufacturing figure on Friday should also come in as expected at 56.5.
We have alight week for Europe with CPI the main driver of the week. We expect inflation to edge up from 1.8 percent to 2.0 percent for February, adding further pressure on European consumers.
Week Commencing Monday 20th February 2017
GREECE: Basket case once more?
The Greek economy unexpectedly shrank in the three months to December, according to latest figures from the government.
Gross domestic product fell 0.4 percent in the final three months of 2016 after growing a revised 0.9 percent in the previous quarter, the Hellenic Statistical Authority stated in a market communication on Tuesday. The market had expected an increase of 0.4 percent in nominal GDP figures. Given the above, the economy grew 0.3 percent over the whole year.
The disappointing Greek figures come as fears grow that the debt crisis could resurface. Greece remains locked in a dispute with creditors as PM Alexis Tsipras’s government refuses to legislating further budget cuts. According to Bank of Greece Governor Yannis Stournaras, the country risks another recession and even greater austerity measures if it doesn’t immediately strike a deal for the release of bailout funds.
UK: Retail sales figures disappoint as Inflation starts to bite!
UK retail sales fell by 0.3 percent in January compared with the previous month, which was well below market expectations of sales growth of 0.9 percent, according to official figures released on Friday.
The Office of National Statistics also reported that retail sales grew by 1.5 percent percent compared with the same period a year ago, but said this was the lowest growth since November 2013.
Consumer spending has been the main driving force behind the UK’s unexpectedly strong growth since the EU referendum last June. Household consumption added 0.5 percent to GDP growth in the third quarter. Statistically however, there is a strong inverse correlation between moves in inflation and retail sales one month later.
With this in mind, Economists have warned that this was the strongest sign to date that the country's economy is set to slow.
FOMC: Janet Yellen not a fan of the Donald's economic plan!
Janet Yellen stuck the knife into Donald Trump last week as she claimed that monetary policy is not on a preset course, indicating rate rises could come sooner rather than later.
Testifying before Congress, the Federal Reserve chairwoman stated that accelerating growth, higher inflation and a robust labour market has generated an additional 16 million jobs since its post-crisis lull in early 2010.
This, she claims, justified her decision to increase rates by 25 basis points in December, and would continue to justify further rate hikes in the months to come. Responding to questions, she declined to comment on the timing of the next hike, which is widely expected to be in March or June.
Her speech contained a note of caution about the new administration and its thirst for tax cuts and infrastructure spending. She dismissed the claim that these plans would lead to looser fiscal policy and more rapid growth. Yellen also faced questions about the administration’s plans to repeal the Dodd-Frank reforms introduced after the 2008 crisis.
Either way, the crash course has been set between Janet Yellen and Donald Trump, who will come out on top?
EUR/USD dipped to 1.0520 last week but has subsequently recovered. Initial bias remains neutral for the week, especially with the 1.0713 minor resistance level intact. CPI might put a spanner in the works should we see a circa 2 percent print, as will further geo-political developments surrounding Brexit and Pence’s visit to Europe.
GBP/USD remains range bound above the 1.2346 level and out outlook remains generally unchanged for the week. Initial bias remains reasonably neutral within the context of Brexit, however GDP and the FOMC will likely test key support and resistance levels. Expect Sterling to trade the range between 1.2346 and 1.2620.
GBP/EUR continues to test the 1.18 level with no luck, with the pair range bound between 1.1650 and 1.18. This is unlikely to change given the lack of data from both sides this week, however watch for GDP or CPI surprises as these could push the rate to these ranges. Geo-politics remains key within the Eurozone, so further developments will be played out by market forces.
Economic Calander for the Week
This week we concentrate on UK GDP, which is expected to uptick by 0.1 percent to 0.7 percent for the fourth quarter. Normally, this would be a Sterling positive event, however given Brexit and inflation woes we remain neutral to bearish on the pair. Apart from this, Mark Carney is speaking on Tuesday and any hint of monetary policy or forecast shifts will impact markets.
Monday is Presidents day, so expect thin afternoon markets during the New York session. Moving to Wednesday, the FOMC should continue to hint on further rate hikes throughout the year, while talk of Janet Yellen’s position within the FOMC may well dominate.
Both existing and new home sales should post positive results, at 5.55 million and 575 thousand respectively. Finally, crude oil inventories should post around the 9.5 million mark.
We await inflation on Wednesday for the Eurozone, with no shift expected in the rate. The current rate sits at a solid 1.8 percent, so expect any increase in this figure to hit Euro markets hard as rate forecasters adjust their expectations.
Week Commencing Monday 13th February 2017
UK: Manufacturing continues to drive forward despite Brexit.
British manufacturing grew at a faster pace than expected in December, demonstrating the strength of the UK economy despite June’s Brexit vote.
The UK economy was the strongest among the G7 nations last year, confounding predictions of a sharp slowdown following the decision by voters to leave the European Union. This strength is widely expected to dissipate as rising inflation eats into the spending power of consumers. In December, manufacturing output jumped by 2.1 percent, much more than the 0.5 percent rise forecast by market analysts.
Industrial output overall rose by 1.1 percent in December, stronger than expectations for a 0.2 percent increase according to market surveys. This takes the year on year growth figure to 4.3 percent, the strongest print since January 2011. UK construction also grew more than expected, up 1.8 percent in December from November, in further upbeat news.
Both the ONS and the Bank of England have increased their growth forecasts for the UK economy this year, putting the UK up for another year of circa 2 percent growth. Fingers crossed!
GREECE: Is a deal in reach?
The Greek government has expressed hope of an imminent deal with its EU creditors, despite a warning from the German finance minister that the country could cut its debt only by leaving the single currency.
Time is of the essence because the deal would need to be approved by Eurozone finance ministers, whom are scheduled to meet on February 20th. Any large delays beyond this date would mean the agreement would face additional challenges from Dutch parliamentary elections in March, followed by French presidential elections in both April and May.
Markets appear to be sceptical, as yields on two year government bonds jumped to their highest level since last June and went above 10 percent to reflect growing anxiety on financial markets over Greece’s ability to keep up to date with debt repayments. Yields on 10 year government bonds were also higher at above 7.8 percent, the highest close since November.
EUR/USD pushed further down last week, suggesting that the corrective rise from 1.0339 to 1.08 has completed. With US inflation and retail sales, data should continue to push this pair lower with the 1.03 low a target to break. Both currencies continue to be driven by geo-political factors, and this remains unchanged.
Initial bias for the week remains neutral, especially given the sheer amount of data expected from both economies. We expect upside to be limited to 1.2774, while 1.2350 should signal the lowest potential trading range for the week. As above, geopolitics remains at the forefront of traders minds, with Brexit remaining a key driver. Any news regarding Brexit will impact Sterling in either direction.
GBP/EUR continues to trade around the 1.17 to 1.18, and while bias is neutral, Sterling is trading close to its 1.20 high. In the absence of any key European data this week, we expect Sterling to continue to trade within its current range, however any break of this key 1.20 level should signal a return to the 1.2350 Fibonacci point.
Economic Calander for the Week
We have a busy week for the UK, with inflation kick starting the week on Tuesday. We expect inflation to rise to 1.9 percent from last months 1.6 percent print. Average earnings and the claimant count change are little to remain reasonably stable, with earning stuck at 2.8 percent and a small decline in the numbers claiming benefits. Friday sees the release of the much anticipated Retail Sales figures. We expect a clear departure from last months -1.9 percent to a more respectable 0.9 percent.
We have a busy week for the US, with PPI kick starting the calendar on Tuesday. We expect monthly inflation to come in as expected at 0.3 percent. Subsequently we await Janet Yellen’s testimony, which may well shed some light on future interest rate decisions. On Wednesday, Retail Sales should decline on the month to a mere 0.1 percent, while the Core reading should increase from 0.2 percent to 0.4 percent. Finally, Thursday sees the Philadelphia Fed Manufacturing decline from last months 23.6 to 18.0.
In Europe we have a light week, with GDP the main focus. We expect Eurozone GDP to come in as expected at 0.5 percent for the quarter. Focus then shifts to the ZEW, also expected to be released on Tuesday. We expect a drop in confidence from a 23.2 level to 22.3, chiefly as Brexit fears continue to create shy investors and Greece re-enters the headlines.
Week Commencing Monday 6th February 2017
UK: Services slow as Brexit trigger looms.
The UK Service Sector rose at its slowest rate in four month, however it was still considerably higher than the 50.0 level, which signals contraction.
January’s Services PMI survey pointed to an easing in the services sector to 54.5 from Decembers 56.2. This indicates the slowest rate of growth since October.
Diving into the report, the survey reported robust levels of optimism as the UK government prepares to trigger Brexit talks by the end of March. The survey did however draw attention to severe inflationary pressure, pushing price rises to their fastest rate since March 2011.
Earlier in the week, the Bank of England revised up its growth forecast for the UK economy to 2 percent, well above the 1.4 percent forecast they made in November. This PMI moderation follows other surveys that have pointed to a fall in consumer borrowing and confidence.
The PMI survey for manufacturing on the other hand, published slightly earlier than the Services figure, reported an acceleration in growth. Brexit Britain may well be turning on its head!
EZ: Inflation pushes higher putting ECB Bond Purchase Program at risk.
Eurozone inflation surged to a near four year high in January, a jump which is likely to intensify the debate surrounding the European Central Bank’s bond buying program.
Annual CPI rose to 1.8 percent in January amid a jump in food and energy costs, up from 1.1 percent in December. This was the highest posted rate since February 2013 and well above the market expectations of 1.5 percent.
Within the Eurozone, Spanish inflation figures jumped to 3 percent in January, while German inflation stood at 1.9 percent. Separately, the European statistics agency said Eurozone gross domestic product rose 0.5 percent quarter-on-quarter in the last three months of 2016, as expected, for a 1.8 percent year-on-year rise. In the whole of 2016, euro zone GDP rose 1.7 percent, down from a five-year high of 2.0 percent in 2015. This puts European GDP at a par, if not exceeding expected US GDP this year.
EUR/USD continues to trade with a neutral bias and is bounded within a tight range below 1.0828. In the absence of any major economic releases, we expect little deviation from this range, so expect the market to bottom out at 1.06 while 1.08 remains our high end estimate.
GBP/USD pushed south as Sterling took a post Bank of England hit last week. We expect to see a continuation of the downside sentiment this week, especially as Brexit and geopolitics are the only points of focus on a light UK economic calendar. We expect 1.22 to be the low end of the range this week, while 1.26 remains somewhat unbreakable.
GBP/EUR followed cable last week with declines back towards 1.15. We expect to see the pair continue to trade within its range, with a similar downside bias as seen in Cable. Mario Draghi remains key for Euro performance this week, and any hint of policy shifts will likely push volatility through the roof on the single currency.
Economic Calander for the Week
We have a quiet week ahead for the UK, with Manufacturing Production the only economic release of note. We expect the figure to decline month on month to 0.5 percent for December, versus Novembers 1.3 percent print. Thursday sees Bank of England Mark Carney speak with any reference to growth or inflation forecasts likely to shift Sterling. Brexit remains key for Sterling and the UK, therefore any statements or releases on either side are likely to dominate headlines.
We have a quiet week for the US, with Crude Oil Inventories and JOLTs Job Openings the only release of note. We expect Job Openings in December to remain roughly in line with previous releases at 5.553 million versus 5.522 previously. Crude Oil should also come in roughly in line with last months 6.466 million print. Most eyes remain on President Trump and his visa ban, so expect geopolitics to continue to dominate.
We only have Mario Draghi on Monday to look forward too this week, who is expected to speak on Monday afternoon. His comments on Eurozone inflation will likely be the main market focus, with any potential shift on his bond buying program the chief concern of markets.
Week Commencing Monday 30th January 2017
UK: GDP smashes forecasts! What Brexit concerns?
Buoyant consumer spending numbers kept the UK economy growing in the fourth quarter, despite Brexit woes.
Gross domestic product grew by 0.6 percent in the three months to December, the same rate as the previous two quarters, said the Office for National Statistics. The growth was higher than expected and countered predictions before and after the June 23 referendum that Britain would be plunged into “inevitable” recession if it voted to quit the EU.
Within the ONS report, it put GDP growth down to the dominant services sector, with a strong contribution from retail sales and travel agency services as consumers continued to spend in shops and online. Business services and finance industries were also strong at the end of last year.
The government was quick to seize on the GDP figures as evidence that the UK will continue to perform well outside the EU. This remains to be seen, with many economic pundits pushing back their gloomy expectations, but not backing away from them. One thing is for sure, the UK economy has handled Brexit extremely well. Long may it continue!
US: GDP goes south at the Donald takes the helm.
Stateside, American gross domestic GDP growth slowed to an annualised rate of 1.9 per cent in the final quarter of 2016.
The annualised estimate was considerably lower than the 2.2 percent that market analysts had been expecting and down from the huge 3.5 percent rate posted in the third quarter. Full year growth for 2016 for the world’s largest economy is now estimated to be 1.6 per cent, down from 2.6 percent in 2015.
This compares with the UK’s Office for National Statistics, which earlier this week estimated that the UK economy grew by 2 percent last year. The slowdown, even if it proves temporary, may well deter the Federal Reserve from raising interest rates again until the economics post-Brexit and Trump become clearer.
Trump’s policies suggest that a GDP growth rate of 4 percent is achievable, however this remains to be seen. With a labour market that some economists say is close to full employment, Trump has inherited a strong foundation. With rising wages, robust housing and strong banks, the promise of infrastructure spending and repatriation of factories will give the US economy a big boost.
The EUR rebounded versus the Greenback last week as Trump fears saw a slight decline in the Dollar. Bias this week remains neutral, however with a heavy week of US data and a potentially hawkish FOMC, the EUR should be on risk. Should we see solid numbers stateside, expect the pair to track south moderately, potentially testing the 1.05 psychological levels.
Sterling remains robust versus the Dollar after a solid performance from Theresa May over the weekend in Washington and Ankara. Bias remains neutral however, verging on negative as we build closer to the Article 50 trigger. This weeks PMI’s could surprise to the upside, and if so expect a mixed bag for Sterling this week, with potential upside remaining at the 1.27 mark while resistance should prevent 1.2250.
Sterling versus the Euro remains a highly volatile pair, with little in the way of side direction. With both Mario Draghi and Mark Carney speaking this week, anything could happen to these rates. Technically, we expect Sterling to struggle to push above 1.18 again, while 1.14 should be hard to break. Expect the pair to trade the range.
Economic Calander for the Week
We have a busy week for the UK with both the Bank of England and the PMI’s all expected to be released. We do not expect any shifts in monetary policy of sentiment from the Bank of England’s MPC, however any comments in the press conference surrounding Brexit’s impact on the UK economy, inflation or interest rate paths could have a serious effect on Sterling.
The PMI’s are widely expect to post slightly lower, with the critical Services PMI expected in at 55.8 versus last months 56.2. Manufacturing should fair slightly better, with only a 0.2 drop from last months 56.1, while Construction should drop from 54.2 to 53.8.
We have a busy week for the US with the FOMC headlining. Any comments surrounding their interest rate hiking path will impact Dollar markets, with any sign of cooling likely to weaken the Greenback further. Nonfarms and Unemployment are both important on Friday, however we do not forecast any change in the unemployment rate and only a marginal increase in payrolls from 156K to 171K.
We have a quiet week for Europe, with Mario Draghi’s speech the highlight. As with Mark Carney, any talk of either Brexit or European integration issues are likely to impact markets more than his economic assessments of the Eurozone. We also look forward to Eurozone inflation, which looks set to make a large jump from 1.1 percent to 1.5 percent.
Week Commencing Monday 23rd January 2017
UK: Retail sales disappoint as GBP induced inflation hits
UK retail sales suffered their biggest slump in more than four years in December, denting what had been projected to be an excellent quarter to the British economy.
Seasonally adjusted volumes, excluding fuel, were 2 percent lower in December than in November, the ONS reported on Friday. This was a much sharper drop than analysts had predicted. The consensus forecast was for a decline of just 0.3 percent. Despite the drop in December, over the fourth quarter as a whole, retail sales grew robustly.
Sales volumes, excluding fuel, were 1.4 percent higher in the fourth quarter than the third quarter. This means the retail sector will have continued to boost economic growth in the final months of 2016. The economic uncertainty of Brexit, coupled with the collapse of Sterling over the past few months, has led to an inflation boom with UK firms warning they will pass on their higher import costs to domestic prices.
Average store prices increased by 0.9 per cent in the year to December, with prices in fuel stores up by 9.7 per cent and 1 per cent in textile, clothing and footwear stores. Overall consumer price inflation rose to 1.6 per cent in December, the ONS reported earlier this week, the highest since July 2014.
CHINA: GDP hits target but headwinds make 2017 more difficult
China’s economy avoided a hard landing in 2016 thanks to robust monetary and fiscal stimulus, but policymakers are now bracing for headwinds as a possible trade war looms under the US presidency of Donald Trump.
Gross domestic product increased 6.8 percent in the three months through December from a year earlier, compared with a 6.7 percent estimates that market analysts predicted. The full-year expansion of 6.7 percent was the slowest since 1990, however still landed within the central governments 2016 target for the year.
Diving into the figures, retail sales increased by 10.9 percent from a year earlier in December, the strongest reading in a year and more than the projected 10.7 percent expected. Meanwhile, Industrial production rose by 6 percent in December from a year earlier, compares with the estimated 6.1 percent rise the market forecast.
Finally, fixed-asset investment, excluding rural areas, expanded 8.1 percent for the full year. All in all, China appears a long way away from the hard landing so many economists predicted.
EUR/USD returns to neutral footing this week after the Euro began holding its own against a more bullish greenback. In the absence of solid US or EU news this week, we expect a mixed trading session where US GDP provides the only real test to current levels. 1.10 remains out of the question, however we expect to see the pair continue to trade the range and settle in the 1.06 – 1.07 range by the end of the week.
GBP/USD continues to track to the upside as Sterling traders continue to bounce after Theresa May’s Brexit speech last week. We expect the week to remain mixed, unless we see a surprise uptick in UK GDP numbers towards the end of the week. Expect 1.25 to be tested, but potentially not broken.
GBP/EUR tracks higher on the back of Theresa May’s speech last week. In the absence on much European data, we expect rates to remains within the 1.14 – 1.16 range. It is unlikely we will see Sterling break through key EUR resistance levels, however it could continue to track higher as we draw closer to the end of the month.
Economic Calander for the Week
We have the all-important UK GDP figures on Thursday, with a strong reading expected despite Brexit woes for the UK economy. We expect GDP for the fourth quarter to decrease slightly, from 0.6 percent down to 0.5 percent.
Despite the slowdown, the annualised figure should remain at 2.1 percent for the year, putting the UK nearly at the top of the pile of G7 growth nations, just behind the US. Outside GDP, we have Mark Carney speaking on Wednesday and Theresa May meeting newly appointed US President Donald Trump on Thursday.
We have a reasonably quiet week for the US, with all eyes focusing on US GDP on Friday. We expect fourth quarter GDP to sit at 2.2 percent. Outside GDP, we expect existing home sales to push slightly lower at 5.5 million units versus 5.61 previously.
New home sales on Thursday should also track down to 586k from 592k previously. Finally, Core durable goods should drop from 0.6 percent to 0.5 percent.
In Europe, we await Mario Draghi’s comments on Monday, where any Brexit or European financial stability issues will likely be monitored closely. The only other indicator of note is the Eurozone Services PMI release on Tuesday, which we expect to tick up from 53.7 to 53.9. All in all, a quiet but decent week for the continent.
Week Commencing Monday 16th January 2017
UK: Theresa May set to outline her vision on Brexit
Theresa May is set to side with Eurosceptic’s and signal that she is prepared to take the UK out of the single market and customs union this week.
In her most significant speech on Brexit since taking office, the Prime Minister seems set to defy critics and call for a total break from the European project.
Within the speech, she is expected to confirm that the UK must be prepared to leave the customs union to secure free trade deals across the world and that she wants to regain full control of its borders, even at the expense of single market membership. She will likely confirm that she desires the UK not be bound by European Court of Justice rulings and finally call for unity after the extremely decisive referendum.
Theresa May’s hard stance comes after European officials appear to be softening their approach, with Michel Barnier conceding that the continent needs to retain access to the City of London. In leaked minutes, it appears that Barnier privately told MEP’s that he wanted a “special” relationship between the remaining 27 European nations and Britain’s financial centre after Brexit.
Earlier this week, Theresa May met her New Zealand counterpart and signalled a desire to write a free trade deal once the UK has left the European structure. This, coupled with warm words presented to Boris Johnson during his visit to President-Elect Trumps team, seems to show some willing from international partners to take advantage of the UK’s new trading status.
In the long-term therefore, it is unclear whether this will be a good move for the UK. In the short-term however, expect Sterling to be well and truly in the crossfire!
TRUMP: The time has come!
Large groups of left-wing protesters are set to try and sabotage Donald Trumps impending inauguration by creating blockades and destroying public property, according to reports.
The controversial President-Elect is set to take the reins on Friday in an elaborate ceremony on Capitol Hill. Just 44 percent of Americans approve of how he has handled his transition to the presidency, compared to 83 percent for Barack Obama, 61 percent for George W Bush and 68 percent for Bill Clinton, a recent poll suggests.
As it stands, little is known about Trumps international policies for the year, however he has signalled solidarity with the UK and celebrated Brexit, while also siding heavily with the Israeli position in the middle east. Friday will be an interesting day, and although we do not expect any substance in the newly incorporated President, his words will be watched closely for any further hints on policy direction.
EUR/USD continued to decline on the back of Brexit woes and Trump, with the 1.06 technical level being breached Monday morning. We expect this trend to continue, with 1.04 potentially in sight should we see negative sentiment from the ECB. Both currencies are likely to trade heavily on the back of Theresa May’s Brexit speech Tuesday, with the Euro on the back foot.
GBP/USD will be dominated by Theresa May’s Brexit speech on Tuesday, with most commentators expecting sharp declines on the rate as a hard Brexit scenario is unveiled. Other economic data is unlikely to shift this sentiment, so Tuesday’s speech will set direction. GBP/USD could drop into the mid-teens on the news, so buyers should seek protection at current levels.
GBP/EUR will likely trade in line with GBP/USD, so all eyes will be on Tuesday’s speech. Should we see a hard Brexit stance, we expect the rate to drop and test the 1.11 – 1.10 range.
Economic Calander for the Week
In the UK all eyes will be on Theresa May on Tuesday, and it is unlikely that other economic events will impact direction while markets await the speech. Outside Theresa May, we have Bank of England Governor Mark Carney speaking Monday, Inflation on Tuesday, Claimant Count on Wednesday and Retail Sales on Friday.
We expect inflation to pick up to 1.4 percent in line with Sterling’s continued declines, while the claimant count is also expected to grow. Retail sales should show flat on the month, with the figure expected to remain at 0.2 percent.
We have a US bank holiday on Monday, so expect markets to be relatively quiet during the day. Moving on, CPI on Wednesday is expected to remain at 0.2 percent while the Philadelphia Fed Manufacturing Index seems set to decline from 21.5 to 16.0 on the month.
We have President-Elect Trump’s inauguration on Friday along with Federal Reserve Chair Yellen speaking on both Wednesday and Friday.
We have a busy week ahead for Europe with CPI kicking off on Wednesday. Starting Wednesday, we expect CPI to remain stable at 1.1 percent for December, which should offer the ECB some rest bite.
Thursday’s ECB meeting should see no change in monetary policy, leaving rates at 0 percent for another month. We also expect no change in the Deposit rate, which should remain at -0.4 percent for the month. Most eyes will be on the press conference, with comments sought on Brexit and any ECB policy responses.
Week Commencing Monday 9th January 2017
UK: British consumers continue to spend despite Brexit woes.
UK consumer spending on credit and debit cards rose 2.6 percent during the last year, with higher spending both online and on the high street, according to numbers from Visa.
The value of total purchases on the high street also rose by 0.7 percent, offering a helping hand to embattled retail firms.
Online consumer spending rockets up by 5.5 percent, while hotels and other recreational service based businesses enjoying a 7.3 percent increase in takings. These figures represent the strongest figures since the fourth quarter of 2014 and suggests that the credit driven consumer boom continues to grow unabated.
It seems that Brexit concerns are not stopping consumers spending their hard earned cash, with many businesses hoping that the consumer will shield them from potential Brexit risks. Will these figures continue? Let’s hope so!
EUROZONE: Inflation continues north irritating ECB policy makers.
Eurozone inflation continues to blast higher, leaving the European Central Bank with a bit of a dilemma.
Annual inflation in the single currency area soared to its highest level since 2013, with the measure hitting 1.1 percent in December. This has pushed the annual figure above 1 percent for the first time since September 2013.
The sudden rise has prompted some European politicians to start calling for higher interest rates, especially in Germany. Despite the headline number climbing sharply from November’s 0.6 percent figure, the core figure only inched up to 0.9 percent from Decembers 0.8 percent. This is important as the core figure strips out volatile energy and food prices from the index.
US: Job creation continues to impress.
US Nonfarm payroll numbers increased by 178,000 jobs last month after a similar rise in November, despite forecasts that the unemployment rate is likely to tick up to 4.7 percent from its current 9 year low of 4.6 percent.
This figure comes as Janet Yellen, the chair of the US Federal Reserve, said that the economy only needed to create just under 100,000 jobs a month to keep up with a growing work-age population.
The numbers, coupled with strong housing and manufacturing data suggest President-elect Donald Trump is inheriting a strong economy from the Obama administration.
That said, given the large increases in jobs creation and rising wages, Janet Yellen may be forced to accelerate her interest rate hike program, putting further pressure on US exports being hurt by a strengthening Greenback.
BREXIT: What ever happened to a "Soft" Brexit anyway?
Theresa May stuck a knife into Sterling over the weekend after a frank interview with Sky news.
Theresa May appeared to suggest the UK Governments default position is a so-called “hard” Brexit, which involves leaving the single market and creating a new trading relationship with the European Union.
This put her at odds with opposition MP’s, while some in the business community have gone as far as calling her reckless. Pressed for details, the Prime Minister would only say she was aiming to deliver a solid trade deal for the UK, allowing UK companies to operate and trade within the single market.
Her comments come after 10 Downing Street is still suffering from Sir Ivan Rogers resignation, their top diplomat in Brussels. In his resignation letter, he criticised the UK government for its “ill-founded arguments and muddles thinking”! A tough week ahead to Theresa by the looks of it!
EUR/USD seems comfortable trading at the 1.0550 level, however bias continues to support a stronger Dollar. With the absence of any European data this week, coupled with a potentially more hawkish Yellen, we expect further moves towards parity as we drawn further into January.
GBP/USD continues to push lower, with no rest in sight. With the bias to the downside, we expect the rate to continue to track down to 1.20 this week, with the potential of Carney and Yellen’s comments to push it back into the teens.
GBP/EUR is trading lower on the back of Theresa May’s Brexit comments on the weekend, with Sterling down 1 percent on Monday morning trading. Emphasis this week will likely remain on this subject, with GBP/EUR potentially hitting as low as 1.1350.
Economic Calander for the Week
We have a reasonably quiet week for the UK, with most eyes on Manufacturing Production on Wednesday and Mark Carney on Thursday.
We expect Manufacturing Production to increase markedly from -0.9 percent to 0.5 percent this month, signalling a solid performance for the sector Mark Carney could offer some clarity on his role this week, and any announcements relating to a potential early departure from the Bank of England would be felt very negatively by markets.
Most importantly however, markets will focus on Brexit rhetoric from the UK government.
In the US we have a busy data week ahead, starting with Crude Oil Inventories on Wednesday. We expect inventories to decline by -7.051 million barrels, however this should do little to influence markets.
Moving to Friday, Yellen is schedules to speak and may well hint at a more aggressive rate path given Trump’s current fiscal stance. Any such conversation will likely to extremely Dollar bullish.
Core and non-core Retail Sales on Wednesday are also key, with 0.5 percent and 0.7 percent expected respectively. Finally, we forecast PPI to decline slightly on the month to 0.3 percent from 0.4 percent.
We have little in the way of European data, with most eyes focusing on the ECB’s Monetary Policy Meeting minutes on Thursday. We expect the Euro to track higher versus Sterling on the back of renewed Brexit woes, while a rate hiking Dollar should continue to erode Euro value as we draw further into January.