May & Trump headline the week...

Week Commencing Monday 16th January 2017

 

UK: Theresa May set to outline her vision on Brexit

Theresa May is set to side with Eurosceptic’s and signal that she is prepared to take the UK out of the single market and customs union this week.

In her most significant speech on Brexit since taking office, the Prime Minister seems set to defy critics and call for a total break from the European project.

Within the speech, she is expected to confirm that the UK must be prepared to leave the customs union to secure free trade deals across the world and that she wants to regain full control of its borders, even at the expense of single market membership. She will likely confirm that she desires the UK not be bound by European Court of Justice rulings and finally call for unity after the extremely decisive referendum.

Theresa May’s hard stance comes after European officials appear to be softening their approach, with Michel Barnier conceding that the continent needs to retain access to the City of London. In leaked minutes, it appears that Barnier privately told MEP’s that he wanted a “special” relationship between the remaining 27 European nations and Britain’s financial centre after Brexit.

Earlier this week, Theresa May met her New Zealand counterpart and signalled a desire to write a free trade deal once the UK has left the European structure. This, coupled with warm words presented to Boris Johnson during his visit to President-Elect Trumps team, seems to show some willing from international partners to take advantage of the UK’s new trading status.

In the long-term therefore, it is unclear whether this will be a good move for the UK. In the short-term however, expect Sterling to be well and truly in the crossfire!

TRUMP: The time has come!

Large groups of left-wing protesters are set to try and sabotage Donald Trumps impending inauguration by creating blockades and destroying public property, according to reports.

The controversial President-Elect is set to take the reins on Friday in an elaborate ceremony on Capitol Hill. Just 44 percent of Americans approve of how he has handled his transition to the presidency, compared to 83 percent for Barack Obama, 61 percent for George W Bush and 68 percent for Bill Clinton, a recent poll suggests.

As it stands, little is known about Trumps international policies for the year, however he has signalled solidarity with the UK and celebrated Brexit, while also siding heavily with the Israeli position in the middle east. Friday will be an interesting day, and although we do not expect any substance in the newly incorporated President, his words will be watched closely for any further hints on policy direction.

 

FX Forecast

EUR/USD continued to decline on the back of Brexit woes and Trump, with the 1.06 technical level being breached Monday morning. We expect this trend to continue, with 1.04 potentially in sight should we see negative sentiment from the ECB. Both currencies are likely to trade heavily on the back of Theresa May’s Brexit speech Tuesday, with the Euro on the back foot.

GBP/USD will be dominated by Theresa May’s Brexit speech on Tuesday, with most commentators expecting sharp declines on the rate as a hard Brexit scenario is unveiled. Other economic data is unlikely to shift this sentiment, so Tuesday’s speech will set direction. GBP/USD could drop into the mid-teens on the news, so buyers should seek protection at current levels.

GBP/EUR will likely trade in line with GBP/USD, so all eyes will be on Tuesday’s speech. Should we see a hard Brexit stance, we expect the rate to drop and test the 1.11 – 1.10 range.

 

Economic Calander for the Week

UK Data:

In the UK all eyes will be on Theresa May on Tuesday, and it is unlikely that other economic events will impact direction while markets await the speech. Outside Theresa May, we have Bank of England Governor Mark Carney speaking Monday, Inflation on Tuesday, Claimant Count on Wednesday and Retail Sales on Friday.

We expect inflation to pick up to 1.4 percent in line with Sterling’s continued declines, while the claimant count is also expected to grow. Retail sales should show flat on the month, with the figure expected to remain at 0.2 percent.

US Data:

We have a US bank holiday on Monday, so expect markets to be relatively quiet during the day. Moving on, CPI on Wednesday is expected to remain at 0.2 percent while the Philadelphia Fed Manufacturing Index seems set to decline from 21.5 to 16.0 on the month.

We have President-Elect Trump’s inauguration on Friday along with Federal Reserve Chair Yellen speaking on both Wednesday and Friday.

EU Data:

We have a busy week ahead for Europe with CPI kicking off on Wednesday. Starting Wednesday, we expect CPI to remain stable at 1.1 percent for December, which should offer the ECB some rest bite.

Thursday’s ECB meeting should see no change in monetary policy, leaving rates at 0 percent for another month. We also expect no change in the Deposit rate, which should remain at -0.4 percent for the month. Most eyes will be on the press conference, with comments sought on Brexit and any ECB policy responses.

 

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