Choppy water ahead...
Week Commencing Monday 13th March 2017
US: To hike or not to hike ... is it even a question?
After strong US jobs data on Friday, there is a strong feeling in currency markets that the US Federal Reserve will raise interest rates on Wednesday.
The rate increase expected on March 15 will be the second in four months, a pace unseen since the peak of the US housing boom in 2006. A rate hike will also bring the Federal Reserve's target rate to between 0.75 - 1.00 percentage, near the bottom of the range within which the Fed operated before the 2007-2009 crisis.
US jobs growth has also been a catalyst, with a survey revealing that 298,000 private sector jobs were created in February, dwarfing the 187,000 that markets expected. Despite the market expecting a rate rise, we still expect significant currency movements on the back of any policy shift.
With the Greenback already trading strongly versus most majors, we expect a take no prisoners attitude and for further Dollar gains as we draw closer towards this middle of the month.
UK: Article 50 here we come!
With Article 50 potentially being triggered this week, all focus is once again on the plight of poor old Sterling.
Sterling is, however, considered relatively cheap given the underlying health of the UK economy. While this presents a buying opportunity for some, the situation is more complex than most! Potential issues, especially in the medium term, continue to surround the health of Corporate Britain.
There is then the risk of inward investment into the UK post Article 50 and Brexit dries up, while the ongoing political relationship between the UK and EU. Sterling is not just susceptible to UK derived shocks, we could see further movements given the improving state of the European economy. Meanwhile, Marine La Pen losing the French presidential election and/or a dovish European Central Bank would all add further pressure.
Sterling post-Brexit declines are not a guarantee, especially given how fluid the situation is. All we do know is that we are in store for an interesting couple of years!
EUR/USD will likely trade the FOMC this week, with an interest rate hike likely to push the pair closer to parity. This, coupled with the potential triggering of Article 50 from the UK could be a bit of a double whammy for the single currency. Should either of these events be triggered, expect declines to touch the 1.04 Euro support level. Declines beyond this point could push to parity.
GBP/USD is going to have a big week! With the FOMC potentially putting rates up and the triggering of Article 50 (in addition to the potential of an announcement of a second Scottish Independence Referendum), a drop through 1.20 does not seem impossible. Should we see one of these geo-political events occurring, expect Sterling to be hit hard.
As with GBP/USD, we expect Sterling to be hit hard versus the Euro on an Article 50 trigger. The rate has been declining for some weeks now, with 1.11 firmly in sight as a worst case scenario. Risk remains to the downside, even if A50 is not triggered, so expect a test of 1.13 as a minimum.
Economic Calander for the Week
We have a busy week for the UK on the economic calendar front, however all eyes will be on parliament and whether article 50 will get royal assent or not this week. Outside this, we have the Claimant Count on Wednesday which is expected to decline further by 5,000. Thursday sees the Bank of England rate decision and MPC minutes. We expect no shift in monetary policy from the bank, however if Article 50 has been triggered expect some comment from the bank to sooth markets.
We expect the Federal Reserve to increase rates this week, so expect most news wires to focus on Janet Yellen. Outside this, we expect retail sales to decline slightly on the month to 0.1 percent from 0.4 percent in January. Building Permits should come in roughly in line with 1.260 million units in the month. The Philadelphia Fed manufacturing Index is poised to decline markedly from 43.3 to 30.0 while Job Openings should decline to 5.450 million.
Eurozone inflation is the star of the European week, with a 2 percent print widely expected. Mario Draghi is speaking on Monday, and as per usual expect any policy hints to effect Euro prices for the week.