Greece remains in the forefront as Sterling explodes on the back of election success!

Week Commencing Monday 18th May 2015

This Week in Brief

In the UK we have CPI on Tuesday, Retail Sales on Thursday and the all-important MPC minutes out on Wednesday. On the whole, Sterling remains reasonably bullish following the general election win for the Conservatives, and with prints expected to be reasonably bullish this week, we expect this trend to continue.

In Europe all eyes continue to focus on the continued struggle between Greece and its creditors, and this remains the number one story to follow. On the data side, we have Flash PMI’s coupled with the German IFO. Mario Draghi is also speaking at the ECB Forum on Central Banking on Friday morning.

In the US we have a reasonably busy week, with the FOMC meeting minutes being released to the market on Wednesday. On the data side, New homes and Existing homes are some of the key releases, with both expected to post generally positive figures. The Philly Fed is also due on Thursday, with a modest increase in the index expected.

Overriding Market Themes

We start this week in embattled Russia, as official statistics show that the economy has contracted by 1.9 percent in the first quarter of the year. This was broadly in line with some analyst’s forecasts and seems to be as a direct result of continued sanctions and the fall in energy prices. However, a recent stabilisation of the financial markets, as seen in the steady rebound in the Rouble, coupled with a slightly elevated oil price and Ukraine peace deal did lead some commentators to speculate that the worst may be over for the country. We believe that we may be able to see some positive growth out of Russia yet, especially given recent and much needed deals between Russia and China. With this in mind, expect GDP to return to positive territory at some point this year, despite continued sanctions. For western politicians, it seems that even nipping the purse strings of the Russia bear is not enough! What’s next?

Moving to the UK now, where construction out rebounded in March, bringing an end of four months of decline in the sector. Total construction output rose by 3.9 percent on the month, following the 0.3 percent decline in February. It must be said however that the release was slightly below analysts’ expectations, which sat at 4.0 percent. Despite the good news, commentators did fall short in saying that it would have a positive impact on last quarter’s terrible GDP figures, even when combined with the better than expected manufacturing data released earlier in the week. Annually, construction has fallen by 1.1 percent, slightly less than the 1.6 percent fall forecast in the preliminary estimates of first quarter GDP. With the election now a distant memory, let’s hope that there is some good news for home builders in the upcoming Queen’s speech!

Finally and sticking with the UK theme, Mark Carney has been at the podium once again revising his growth forecasts for the year. The Bank of England has cut its 2015 growth forecasts from 2.9 percent to 2.5 percent this year, with next year’s forecast begin cut from 2.9 percent to 2.6 percent. The bank also increased its expectations for inflation to increase by the end of this year, while it also appeared to endorse then general expectation of an interest rate hike by the middle of next year. The UK has had an interesting time of things post financial crisis. We were, in many respects, the worst hit out of all the major economies when the crisis started back in 2008. Since then, the UK was the fastest growing major economy in 2014, and has made up lost ground meaning that the economy is now larger than at its peak in 2007. Despite the revision, it is still worth noting that these growth figures are still extremely positive in the main, and considerably higher than other advanced economies such as France and even Germany. With this in mind, we do not expect to change out Sterling long term forecast, and it is true to say things are looking up for the UK currency. The only exception being the US Dollar, with rate rises expected this year, nothing will stop the Greenback pushing all other currencies into the red! You have been warned!

GBP This Week

Sterling rallied extremely strongly on the back of the unexpected conservative majority which was formed post general election, and removed a large degree of political uncertainty from the equation. However, with the Bank of England’s downside revisions to GDP growth coupled with interest rate expectations being pushed back, this rally could be short lived.

On the data front, Wednesday’s Bank of England MPC minutes will be watched closely, however we expect no rebellions with the vote tally likely to remain 9-0 for no change in rates or asset purchases. The minutes themselves are likely to be the interesting read, with fiscal consolidation and the potential EU referendum likely to impact general monetary policy decision making from now on. We also are watching CPI inflation, which we expect to have risen 0.5 percent month on month in April. Retail sales finally on Thursday should have grown 0.4 percent on the month.
USD This Week

Mixed US data has done little to boost the fortunes of the Greenback in recent weeks, however it appears that the underlying trend of the US economy remains firmly in bullish territory. This week we will concentrate on housing starts, existing home sales and the Philadelphia Fed, all to be released on Tuesday and Thursday respectively. We expect housing starts for April to rise to 982k, which is slightly below market forecasts of just over 1000k. Meanwhile, we expect existing home sales to rise slightly to 5.2 million units from 5.19 million units previously. Again, this is below forecast of 5.22 million but still reflects decent upside pressure within the sector.

In terms of USD appreciation, we expect it to remain under pressure for the immediate term (for the next few weeks). Big drivers are likely to be external factors surrounding the Eurozone and any further indication from the Fed on when rates will rise.

EUR This Week

Greece remains the deciding factor on all European economic news, and despite progress between the county and its creditors, we believe some significant differences remain. Although an agreement remains possible at this stage, it is becoming less and less likely, especially given that forecasters predict that Greece will run out of money in the coming weeks. This will without question drive the EUR for the remainder of the week, and any developments will dictate direction.

On the data front, we expect Euroarea HICP and core inflation to be confirmed in at 0.0 percent and 0.6 percent respectively. The Euro area flash PMI result on Thursday is likely to push down somewhat on the month to 53.6 owing to a reduction in manufacturing confidence. Services PMI should hold relatively steady at 54.0.

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