GBP falls Theresa May signals hard Brexit probable...

Week Commencing Monday 9th January 2017

 

UK: British consumers continue to spend despite Brexit woes.

UK consumer spending on credit and debit cards rose 2.6 percent during the last year, with higher spending both online and on the high street, according to numbers from Visa.

The value of total purchases on the high street also rose by 0.7 percent, offering a helping hand to embattled retail firms.

Online consumer spending rockets up by 5.5 percent, while hotels and other recreational service based businesses enjoying a 7.3 percent increase in takings. These figures represent the strongest figures since the fourth quarter of 2014 and suggests that the credit driven consumer boom continues to grow unabated.

It seems that Brexit concerns are not stopping consumers spending their hard earned cash, with many businesses hoping that the consumer will shield them from potential Brexit risks. Will these figures continue? Let’s hope so!

EUROZONE: Inflation continues north irritating ECB policy makers.

Eurozone inflation continues to blast higher, leaving the European Central Bank with a bit of a dilemma.

Annual inflation in the single currency area soared to its highest level since 2013, with the measure hitting 1.1 percent in December. This has pushed the annual figure above 1 percent for the first time since September 2013.

The sudden rise has prompted some European politicians to start calling for higher interest rates, especially in Germany. Despite the headline number climbing sharply from November’s 0.6 percent figure, the core figure only inched up to 0.9 percent from Decembers 0.8 percent. This is important as the core figure strips out volatile energy and food prices from the index.

US: Job creation continues to impress.

US Nonfarm payroll numbers increased by 178,000 jobs last month after a similar rise in November, despite forecasts that the unemployment rate is likely to tick up to 4.7 percent from its current 9 year low of 4.6 percent.

This figure comes as Janet Yellen, the chair of the US Federal Reserve, said that the economy only needed to create just under 100,000 jobs a month to keep up with a growing work-age population.

The numbers, coupled with strong housing and manufacturing data suggest President-elect Donald Trump is inheriting a strong economy from the Obama administration.

That said, given the large increases in jobs creation and rising wages, Janet Yellen may be forced to accelerate her interest rate hike program, putting further pressure on US exports being hurt by a strengthening Greenback.

BREXIT: What ever happened to a "Soft" Brexit anyway?

Theresa May stuck a knife into Sterling over the weekend after a frank interview with Sky news.

Theresa May appeared to suggest the UK Governments default position is a so-called “hard” Brexit, which involves leaving the single market and creating a new trading relationship with the European Union.

This put her at odds with opposition MP’s, while some in the business community have gone as far as calling her reckless. Pressed for details, the Prime Minister would only say she was aiming to deliver a solid trade deal for the UK, allowing UK companies to operate and trade within the single market.

Her comments come after 10 Downing Street is still suffering from Sir Ivan Rogers resignation, their top diplomat in Brussels. In his resignation letter, he criticised the UK government for its “ill-founded arguments and muddles thinking”! A tough week ahead to Theresa by the looks of it!

 

FX Forecast

EUR/USD seems comfortable trading at the 1.0550 level, however bias continues to support a stronger Dollar. With the absence of any European data this week, coupled with a potentially more hawkish Yellen, we expect further moves towards parity as we drawn further into January.

GBP/USD continues to push lower, with no rest in sight. With the bias to the downside, we expect the rate to continue to track down to 1.20 this week, with the potential of Carney and Yellen’s comments to push it back into the teens.

GBP/EUR is trading lower on the back of Theresa May’s Brexit comments on the weekend, with Sterling down 1 percent on Monday morning trading. Emphasis this week will likely remain on this subject, with GBP/EUR potentially hitting as low as 1.1350.

 

Economic Calander for the Week

UK Data:

We have a reasonably quiet week for the UK, with most eyes on Manufacturing Production on Wednesday and Mark Carney on Thursday.

We expect Manufacturing Production to increase markedly from -0.9 percent to 0.5 percent this month, signalling a solid performance for the sector Mark Carney could offer some clarity on his role this week, and any announcements relating to a potential early departure from the Bank of England would be felt very negatively by markets.

Most importantly however, markets will focus on Brexit rhetoric from the UK government.

US Data:

In the US we have a busy data week ahead, starting with Crude Oil Inventories on Wednesday. We expect inventories to decline by -7.051 million barrels, however this should do little to influence markets.

Moving to Friday, Yellen is schedules to speak and may well hint at a more aggressive rate path given Trump’s current fiscal stance. Any such conversation will likely to extremely Dollar bullish.

Core and non-core Retail Sales on Wednesday are also key, with 0.5 percent and 0.7 percent expected respectively. Finally, we forecast PPI to decline slightly on the month to 0.3 percent from 0.4 percent.

EU Data:

We have little in the way of European data, with most eyes focusing on the ECB’s Monetary Policy Meeting minutes on Thursday. We expect the Euro to track higher versus Sterling on the back of renewed Brexit woes, while a rate hiking Dollar should continue to erode Euro value as we draw further into January.

 

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