BREXIT negotiations begin...

Week Commencing Monday 3rd April 2017

 

EU: Inflation causes speculation on QE drop.

Eurozone inflation has fallen from its highest level in four years last month, slipping sharply to 1.5 percent from 2 percent in the previous month.

Consumer prices had surged faster than expected at the start of 2017 as rebounding global oil prices pushed up energy costs and led to Eurozone inflation hitting 2 percent for the first time since 2012. Underlying inflation, a measure closely watched by the ECB, meanwhile fell to 0.7 per cent from 0.9 per cent, all but erasing pressure on Draghi to tighten the ECB’s money taps soon, many months before its currency guidance.

When overall inflation hit the ECB’s target last month, conservative countries like Germany piled pressure on Draghi, calling for an end to the bank’s EUR 2.3 trillion asset buying scheme. The ECB repeatedly rejected those calls, arguing that inflation has already peaked this year and will not return back towards its 2.0 percent target perhaps until 2019, as unemployment remains high, wage growth is feeble and the economy is still operating with significant slack.

UK: Falklands mark 2.0!

Spanish Foreign Minister Dastis moved to calm down a diplomatic spat with the UK over the status of Gibraltar after a weekend of heated rhetoric that climaxed in a suggestion Britain could go to war over the territory.

The diplomatic spat threatens to spoil Prime Minister Theresa May’s hopes that Spain might be an ally in her negotiations with the European Union. The first indication of trouble came on Friday, when it emerged that EU President Donald Tusk had handed Spain a determining say on whether any Brexit deal will apply to Gibraltar.

Meanwhile, optimism among UK chief financial officers climbed to an 18 month high in the weeks before Prime Minister Theresa May formalized Britain’s intention to leave the European Union. Almost a third of CFOs said they are more optimistic about prospects for their company than they were three months ago, according to a survey published by leading accounting firm Deloitte. While finance chiefs’ risk appetite rose, it remains below long-term averages and is about half the level seen in the year preceding the referendum.

 

FX Forecast

Sterling (GBP) - Sterling consolidated its gains last week after the historic triggering of Article 50 by the UK government, with GBP/USD at 1.25 and GBP/EUR at just over 1.17. With this week concentrating on further Brexit related Geopolitical events and UK PMI’s, Sterling should be on track for a mixed week. 1.26 and 1.18 remain key psychological levels, while any negative prints could see a slight reversal given Sterling’s recent bullish performance.

US Dollar (USD) - The Greenback had a mixed week last week with it losing ground against Sterling and providing little resistance versus the Euro. The majority of data releases are towards the back of the week, so we expect little volatility until then. Dollar gains could see EUR/USD push down through 1.06, while 1.25 appears now to have some solid support.

Euro (EUR) - The Euro should trade on further inflation related comments from Draghi this week, where any hint of reducing QE should provide it with some power to fight a resurgent Sterling. 1.16 now has some resistance to countenance an aggressive Euro, however a poor set of UK PMI’s could see this level tested and potentially broken.

 

Economic Calander for the Week

UK Data:

We have the usual set of UK PMI’s this week, with all three expected to some slight gains over the month. Manufacturing PMI kicks off the calendar with a print of 55.1 versus 54.6 expected. Construction follows where market expectations sit at 52.6 versus last month’s 52.5 print.

Finally, Services is the highlight of the week, with expectations set for no movement from the 53.5 posted last month. Should any of these post lower than expectations, we should see Sterling sell off.

US Data:

We have a busy week for the US, starting with ISM Manufacturing on Monday. We expect a print of 57.0 versus last months 57.7. ADP Nonfarm Employment should come in roughly in line with the last print of 53.3 while ISM Non-Manufacturing should come in at 57.0.

The FOMC minutes will be the highlight, and any comments regarding potential further interest rate hikes will push the Greenback higher on the day. Finally, Nonfarms and Unemployment will finish off the week, however we expect little change in either.

EU Data:

Euro news is dominated by Mario Draghi, who is speaking on both Tuesday and Thursday. Any hint of a reduction in QE on the back of last weeks inflation figures will likely provide support for the Euro. Outside this, both the Euro and Sterling will continue to trade on the back of ongoing Brexit news.

 

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