Weekly Analysis 15.02.2016

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Last week proved eventful as continued stock market turmoil and oil price losses sparked a flight to safety. The euro strengthened as a safe haven currency. Sterling-euro fell below 1.27 to its lowest level since December 2014 while euro-dollar broke above the 1.13 mark for the first time since October. The calendar highlight of the week was likely Fed Chair Yellen’s testimony on monetary policy before Congress. While stock market volatility largely occupied markets’ attention last week, a busier calendar may receive markets’ focus this week. Announcements and releases of note include testimony from ECB President Draghi, inflation figures from the UK and US, the Fed’s January meeting minutes, and the two-day EU Summit beginning Thursday. PM Cameron has previously said that the UK’s EU negotiations could be completed as soon as this meeting.
GBP – Last week’s calendar was relatively light for the pound. The UK’s December Trade deficit was narrower than forecast but offered the pound limited support. Manufacturing Production and Industrial Production m/m both disappointed, contracting 0.2% and 1.1% respectively, yet only briefly weakened the pound on Wednesday before it recovered some lost ground. MPC Member Cunliffe spoke, warning of the possible risks to stability of a rapid increase in lending, which could require central bank intervention. As the UK’s upcoming EU Referendum remains in focus, concerns regarding a possible focus have continued to weigh on the pound.
The calendar picks up for Sterling this week. Inflation figures out Tuesday may see a further uptick in y/y CPI, from 0.2% to 0.3%, while the Unemployment Rate is forecast to drop to 5.0% from 5.1%. Retail Sales are forecast to return to growth, rising 0.9% on a month-to-month basis. Positive figures could offer the pound some relief. The week’s other main release, Average Earnings, may disappoint, as growth is expected to increase but at a slower pace than previously. Some members of the MPC have indicated that they are looking to see an increase in wage growth to support a greater pick-up in inflation. The UK’s EU negotiations will be particularly in focus this week as EU leaders meet at a two-day summit beginning Thursday. Investors should keep an eye on the impact of the meetings, particularly as to whether there is any resolution of the negotiations.
EUR – The euro received further support last week as a safe haven amidst renewed stock market and oil price losses. The euro strengthened to its highest levels against the pound since December 2014 and against the dollar since October 2015. Risk aversion and a flight to safety were the primary drivers of euro movement last week. The main releases of note were Friday’s preliminary Q4 GDP figures. Economic growth in both Germany and the Eurozone met expectations at 0.3%.
The main releases for this pairing are the latest Economic Sentiment figures. Economic Sentiment is forecast to worsen, dropping from 10.2 to 0.1 in Germany and 22.7 to 10.3 in Tuesday. Attention will also be on ECB President Draghi’s before the European Parliament’s Economic and Monetary Affairs Committee for further clues as the likelihood and degree of possible further easing from the ECB at its March meeting. The ECB will also release its January Monetary Policy Meeting Accounts, although the minutes may provide limited new information following Draghi’s testimony earlier in the week.
USD – The main event for the US last week was Fed Chair Yellen’s two-day testimony before Congress. Yellen indicated that the Fed remains likely to raise interest rates again when it next moves on rates, although the Fed could consider other options, including whether negative interest rates would work in the US, should the outlook deteriorate. FOMC Member Dudley said on Friday that a discussion of negative interest rates in the US was “extraordinarily premature” but that the financial market volatility might weigh on the pace at which inflation returns to the Fed’s 2% target rate. Other items of note last week included Unemployment Claims, which fell to 269K, a seven-week low after rising as high as 293K in January, and Retail Sales, which unexpectedly ticked up 0.1%.
This week, attention will be on the Fed’s January meeting minutes, out Wednesday, and January inflation figures, out Friday. Inflation is expected to remain low, with CPI m/m again dipping 0.1%, while Core CPI m/m may tick up 0.2%. Other releases out this week include weekly Unemployment Claims, Building Permits, Producer Price Index, and the Philly Fed Manufacturing Index. Investors should also keep an eye on comments from Fed members Rosengren, Bullard, and Mester.
Regards All.
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