UK Inflation pushing 2% ??
Week Commencing Monday 13th February 2017
UK: Manufacturing continues to drive forward despite Brexit.
British manufacturing grew at a faster pace than expected in December, demonstrating the strength of the UK economy despite June’s Brexit vote.
The UK economy was the strongest among the G7 nations last year, confounding predictions of a sharp slowdown following the decision by voters to leave the European Union. This strength is widely expected to dissipate as rising inflation eats into the spending power of consumers. In December, manufacturing output jumped by 2.1 percent, much more than the 0.5 percent rise forecast by market analysts.
Industrial output overall rose by 1.1 percent in December, stronger than expectations for a 0.2 percent increase according to market surveys. This takes the year on year growth figure to 4.3 percent, the strongest print since January 2011. UK construction also grew more than expected, up 1.8 percent in December from November, in further upbeat news.
Both the ONS and the Bank of England have increased their growth forecasts for the UK economy this year, putting the UK up for another year of circa 2 percent growth. Fingers crossed!
GREECE: Is a deal in reach?
The Greek government has expressed hope of an imminent deal with its EU creditors, despite a warning from the German finance minister that the country could cut its debt only by leaving the single currency.
Time is of the essence because the deal would need to be approved by Eurozone finance ministers, whom are scheduled to meet on February 20th. Any large delays beyond this date would mean the agreement would face additional challenges from Dutch parliamentary elections in March, followed by French presidential elections in both April and May.
Markets appear to be sceptical, as yields on two year government bonds jumped to their highest level since last June and went above 10 percent to reflect growing anxiety on financial markets over Greece’s ability to keep up to date with debt repayments. Yields on 10 year government bonds were also higher at above 7.8 percent, the highest close since November.
EUR/USD pushed further down last week, suggesting that the corrective rise from 1.0339 to 1.08 has completed. With US inflation and retail sales, data should continue to push this pair lower with the 1.03 low a target to break. Both currencies continue to be driven by geo-political factors, and this remains unchanged.
Initial bias for the week remains neutral, especially given the sheer amount of data expected from both economies. We expect upside to be limited to 1.2774, while 1.2350 should signal the lowest potential trading range for the week. As above, geopolitics remains at the forefront of traders minds, with Brexit remaining a key driver. Any news regarding Brexit will impact Sterling in either direction.
GBP/EUR continues to trade around the 1.17 to 1.18, and while bias is neutral, Sterling is trading close to its 1.20 high. In the absence of any key European data this week, we expect Sterling to continue to trade within its current range, however any break of this key 1.20 level should signal a return to the 1.2350 Fibonacci point.
Economic Calander for the Week
We have a busy week for the UK, with inflation kick starting the week on Tuesday. We expect inflation to rise to 1.9 percent from last months 1.6 percent print. Average earnings and the claimant count change are little to remain reasonably stable, with earning stuck at 2.8 percent and a small decline in the numbers claiming benefits. Friday sees the release of the much anticipated Retail Sales figures. We expect a clear departure from last months -1.9 percent to a more respectable 0.9 percent.
We have a busy week for the US, with PPI kick starting the calendar on Tuesday. We expect monthly inflation to come in as expected at 0.3 percent. Subsequently we await Janet Yellen’s testimony, which may well shed some light on future interest rate decisions. On Wednesday, Retail Sales should decline on the month to a mere 0.1 percent, while the Core reading should increase from 0.2 percent to 0.4 percent. Finally, Thursday sees the Philadelphia Fed Manufacturing decline from last months 23.6 to 18.0.
In Europe we have a light week, with GDP the main focus. We expect Eurozone GDP to come in as expected at 0.5 percent for the quarter. Focus then shifts to the ZEW, also expected to be released on Tuesday. We expect a drop in confidence from a 23.2 level to 22.3, chiefly as Brexit fears continue to create shy investors and Greece re-enters the headlines.