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Week Commencing Monday 21st March 2016
Overriding Market Themes
Last week Mark Carney confirmed that interest rates are to be held for the 84th consecutive month, with many analysts predicting the current record low could persist for a further year. The Bank of England's Monetary Policy Committee voted unanimously for the second month in a row not to increase the base rate from 0.5 per cent. At one time in the early and middle parts of last year, governor Mark Carney was laying the ground for a rates rise perhaps as soon as the turn of this year. But since then, the global economic outlook has sharply worsened and UK prospects have wilted. Markets are now pencilling in the first rise in rates in 2019, with some suggesting rates could be cut before they go up again. This, coupled with the ongoing geo-political fears surrounding “Brexit”, is whipping up continued volatility in Sterling markets. This is likely to continue as we draw closer to the referendum date, and if polls start shifting firmly in exits favour, expect some significant downside movements ahead.
In more upbeat news, President Obama is in Cuba in a trip which is hoped to open a new chapter in US engagement with the islands communist government. The three day trip is the first by a US president to Cuba in 88 years, and the culmination of a diplomatic opening announced by Obama and Cuban President Raul Castro in December 2014. This would effectively end the standoff that began when the Cuban revolution ousted a pro-American government in 1959. Obama will hold talks with Raul Castro and speak to a select group of Cuban entrepreneurs on Monday. He will then privately meet dissidents and address Cubans live on state-run media on Tuesday.
GBP This Week
UK inflation is the focus piece from a data perspective this week, with the figure likely to remain low at 0.4 percent. Retail sales are also expected to shake things up, with consensus putting a print of negative 0.7 percent on the index. Given the above, we doubt that Sterling will be able to muster any significant strength versus both the Euro or US Dollar this week.
The EU referendum is likely to remain the most powerful market mover for Sterling however. This week we have the Royal Economic Society Plenary Session on the costs and benefits of EU membership on Tuesday. On the same day, MPC member Forbes will speak on the current account deficit which will also likely focus on the impact of a Brexit.
USD This Week
This week we wait for Richmond Fed President Lacker to speak on both inflation and inflation expectations on Monday. He joins a number of other Feb members on the press conference run including Lockhart, Evens, Bullard and Karker. We believe that Lacker and many others will be relatively hawkish, giving Dollar bulls a reason to back the greenback at the start of the week.
Data wise, durable goods on Thursday should show that February orders have fallen sharply, potentially to 3.8 percent. We also expect a 0.3 percent drop in the non-transportation index and a 0.4 percent drop in core capital goods.
EUR This Week
Manufacturing and services confidence should improve slightly in both France and Germany, indicating the continued rebound in major European data sets. The German March IFO business climate index is also likely to improve to 107 because of the marginal rebound in Industrial Production. All in all, we have a somewhat dull week ahead for Europe, so expect GBP/EUR to trade on the back of continued Brexit fears and EUR/USD to trade on a potentially more hawkish Fed.