Busy week as March approaches...
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.