BREXIT moves into the limelight...
Week Commencing Monday 22nd February 2016
Overriding Market Themes
A lack of direction has led to a fairly range bound FX market over the last week. The Pound did manage to hold some ground against many of its peers, following hawkish comments from MPC Committee member Cunliffe who intimated that UK rates could move “sooner than markets expect”. David Cameron continued his discussions with the European Parliament around UK/EU membership last week, with a deal being agreed on Friday evening, a deal to reform the EU which David Cameron claims will give Britain "special status" within the bloc.
It is worth noting that although a deal with 27 leaders of the EU has been agreed, Mr Cameron did not get things all his own way. Mr Cameron had originally wanted a complete ban on migrants sending child benefit abroad but had to compromise after some eastern European states rejected that and also insisted that existing claimants should continue to receive the full payment. On how long the UK would be able to have a four-year curb on in-work benefits for new arrivals, Mr Cameron had to give way on hopes of it being in place for 13 years, settling for seven instead. The agreement on renegotiating the UK's EU membership was announced by European Council president Donald Tusk, who tweeted: "Deal. Unanimous support for new settlement for #UKinEU.". German Chancellor Angela Merkel predicted the package of reforms would "elicit support in the UK for the country to remain in the EU".
The UK unemployment rate has fallen to its lowest rate in more than a decade but wage growth has slowed. The rate hit 5.1% in the three months to November - its lowest rate since the three months to October 2005, according to the Office for National Statistics. The number of people out of work fell by 99,000 to 1.68 million in the three-month period. Average weekly earnings, including bonuses, were up 2%, the slowest increase since February. The 2% growth in wages was below the 2.1% growth forecast in a Reuters survey. Excluding bonuses, average weekly earnings growth slowed to 1.9% in the three months, the ONS said. The figures show that the employment rate hit 74% - the highest since comparable records began in 1971.
EUR struggled to hold onto its recent gains throughout last week, as a light economic calendar gave little support to the single currency.
GBP This Week
With David Cameron reaching an agreement late on Friday with EU leaders that will give the UK ‘special status’, it is expected that he will announce the date of the referendum to decide whether Britain will remain part of the EU. This coupled with UK GDP Second Estimate on Thursday and the G20 meetings in Shanghai on Friday will be the main drivers for the Pound this week. UK Second Estimate GDP is expecting to reflect the preliminary release of last month and post a 0.5% quarter on quarter increase for Q4 2015.
The markets will be waiting to see if the widely expected date of Thursday 23rd June will be confirmed by David Cameron. Once the date is announced, ministers will be allowed to campaign for whichever side they want - one of Mr Cameron's closest political allies Michael Gove has already been named as supporting the Leave camp. Others, such as Iain Duncan Smith are expected to follow - but a question mark remains over which way London Mayor Boris Johnson will jump.
USD This Week
The FX economic calendar does not bring any major releases this week apart from the GDP reading on Friday, with the lesser releases of Consumer Confidence, Oil Inventories and Unemployment claims coming to the forefront of economists’ attention. Tuesday sees the release of CB Consumer Confidence is expected to halt its climb back to the 100 mark, which it has been trying to get back to since October 2015. The release is expected to come out at around the 97.5 mark which is fall from last month’s post of 98.1.
Oil inventories and U.S. unemployment claims should give some insight into market direction but it will be talk of cooperation that could boost the FX market as well as more details on the OPEC-Russia agreement on the commodities side. The weekly Unemployment claims are expected to rise from last week’s better than expected post off 262K to 271K. That said the forecasting of US Unemployment claims is somewhat off a stab in the dark as it has not come out as expected since December 17th 2015, 11 releases ago.
In the previous estimate for Q4 the GDP grew by 0.7% — a bit lower than expected. The current estimates are for the GDP growth rate to fall to 0.5%. A better than expected growth rate could drive higher the U.S. dollar, equities and commodities.
EUR This Week
The only release of note from the Euro-zone it German IFO business climate on Tuesday. The survey is highly respected due to its large sample size and historic correlation with German and wider Eurozone economic conditions. It is expected to remain around 107 marks, the same as last month’s release.
On another note we have the G20 meeting in Shanghai on Friday which is expected to focus on the Chinese slowdown, the energy price tumble and U.S. monetary policy. The IMF and the OECD have called on the 20 largest economies to sit down and come to an agreement on how to reverse the global slowdown. The diverging paths taken after the Fed broke ranks with central banks that build a low rate environment has unshackled volatility but at the cost of market confidence. There is no doubt that the Finance ministers and central bankers will discuss current events in a hope to find a way to boost global growth, but always with a regional goal in mind.