Carney under fire as Pre-Brexit recover from intervention...

Week Commencing Monday 16th May 2016

Overriding Market Themes

US retail sales in April recorded their biggest increase in a year as consumers stepped up purchases of autos and a range of other goods, suggesting the economy was regaining momentum after growth almost stagnated in the first quarter. Friday’s retail sales report saw sales jump 1.3 percent last month, accounting for the largest gain since March 2015. The broad increase in retail sales last month is a welcome break for the sector that has struggled with lacklustre demand, and suggests economic growth is picking up after braking to a 0.5 percent annualised rate in the first three months of the year. Diving into the figures, auto sales rose 3.2 percent, the largest increase since March 2015, after slumping 3.2 percent in March. Receipts at petrol stations increased 2.2 percent, reflecting recent increases in fuel prices. Sales at electronics and white goods stores increased 0.5 percent. Building materials and garden equipment store receipts, however, fell 1.0 percent last month, the largest decline since August. Sales at restaurants and bars rose 0.3 percent.

Moving to Europe now, growth in the Eurozone was revised down to 0.5 per cent for the first quarter, despite an unexpected boost from Germany. The economies of 17 of the Eurozone countries were in positive territory, leaving only Greece and Latvia as the only economies contracting. Germany and Spain lead the way, recording improvements of 0.7 and 0.8 percent respectively, with France adding a respectable 0.5 percent from January to March. Italy managed a modest 0.3 percent which was broadly in line with expectations. Greece’s economy shrank 0.4 percent in the first quarter compared with the final three months of 2015. GDP was down by 1.3 percent from the same period a year ago. It seems therefore that despite the positive numbers, a number of key risks continue to weigh on the zone, with the migrant crisis, Brexit and a slowdown in China all pushing key numbers down.

Finally, Bank of England governor Mark Carney has warned that the risks of leaving the EU could possible include a technical recession in Britain. He was speaking as the Bank released its latest forecasts for the economy showing a softer outlook for growth and as it announced a decision to hold interest rates at their record low of 0.5 percent. In 2017 and 2018, the bank is anticipating growth to be revised downwards to 2.3 percent, from 2.5 percent that was forecast in February 2016. This leaves many Investors cautiously eyeing the GBP in the run up to the June 23 referendum.


GBP This Week

We have a busy week ahead for the UK with inflation, labour market and retail sales numbers all due to be released. We expect Aprils headline and core CPI prices on Tuesday to increase 0.7 percent on the year and 1.7 percent on the year respectively. Labour market data on Wednesday should show a steady unemployment rate in March but faster headline wage growth, potentially by around 1.7 percent. The April claimant count should decrease by 2.0k, while finally UK retail sales on Thursday should edge up in April by half a percent.

Wednesday also sees the Queens speech at the opening of the new parliamentary session, with Her Majesty reading parliaments new legislative program for the coming year.

Despite the above, Sterling will continue to trade in and around the Brexit debate, and with Bank of England Governor Mark Carney’s intervention late last week, we expect the “Bremain” camp to try and capitalise on the momentum. With this in mind, Sterling continues to test the 1.27 level while GBP/USD continues to track lower towards 1.42 on the back of UK interest rate expectations.

USD This Week

The most important event this week is the Minutes of the April FOMC meeting on Wednesday. Many economists now believe that the new rate hike will likely be pushed back to September, especially in the context of growing financial market volatility. Markets will likely examine the notes to see to what extent (if any) these concerns may have waned.

Moving to CPI on Tuesday, we expect headline CPI to have risen by 0.4 percent, in line with market expectations, while core CPI should edge up by 0.2 percent. Overall, we look for the headline CPI figure to have accelerated to 1.1 percent for the year. Also on Tuesday, we expect Industrial Production to have risen 0.6 percent on the month, while manufacturing production should bounce 0.5 percent.

It seems that the USD has finally settled down and is beginning a slow retracement back towards it yearly high. We expect to continue to strengthen against both the Euro and Sterling, especially as last week’s retail sales figures confirm the American consumer remains in good shape.

EUR This Week

We have a very quiet week ahead for the Euro with April consumer prices on Wednesday being the only economic release of note. We expect the figure to be deflationary on an annual basis, with the monthly figure flat and the annual sitting at -0.2 percent. Thursday sees the ECB release the minutes from its April meeting, however we are unlikely to see anything new and/or ground-breaking.

With the above in mind, expect EUR/USD to trade within its current technical resistance levels, reaching highs of 1.1620 and support at 1.1370. GBP/EUR will likely trade around the Brexit situation, with Sterling continuing to test new highs of 1.27. All in all, not the most exciting week for Europe!



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