Morning All; we’ll see a new weekly currency Outlook.
Calendar highlights last week included CPI figures from both the UK and the US, Sterling weakness as the UK’s EU negotiations concluded, and the release of the Fed’s January meeting minutes. Oil prices may remain in focus again this week following last week’s tentative production freeze agreement, while other highlights will likely include the BOE’s Inflation Report Hearings, the second estimates of Q4 GDP from both the UK and the US, and any EU Referendum developments. Brexit fears will remain a risk to Sterling strength this week, and may lead the pound to again test recent lows.
GBP – There were several releases out from the UK last week. According to the Consumer Price Index, inflation rose 0.3% in January compared to a year prior, while core inflation slowed to 1.2% from 1.4% in December. Average Earnings growth slowed to 1.9% in December from November’s upwardly revised 2.1%, while the Unemployment Rate unexpectedly held steady at 5.1%, the lowest level since 2005, instead of falling further as forecast. Retail Sales were another highlight, jumping 2.3% after previously declining 1.4%, the fastest growth in approximately two years. Public Sector Net Borrowing fell in January, resulting in a surplus of 11.8B. The UK’s EU Referendum was in particular focus last week as the EU Summit by which Prime Minister hoped to conclude negotiations began on Thursday. The pound strengthened late on Friday after a deal was announced, only to reverse those gains heading into Monday morning after London Mayor Boris Johnson declared his support for a Leave vote.
There are few major economic releases from the UK this week. The main release is Thursday’s second estimate of Q4 GDP growth, forecast to remain unchanged at 0.5%. If there are any revisions, the pound could strengthen or weaken in reaction. The other release to keep an eye on is Preliminary q/q Business Investment, forecast to slow to 0.6% from 2.2%. The slowdown could weigh slightly on the pound but would likely be overshadowed by any change in GDP, out on the same day. Concerns regarding the UK’s EU Referendum may continue to weigh on the pound this week, following Mayor Johnson’s support for a Brexit, and will remain a risk in the coming months as campaigns for both sides get underway. Markets will also keep an eye out for any relevant headlines from the first day of G20 meetings on Friday. Markets will watch Tuesday’s Inflation Report Hearings for any updated guidance from the BOE, and MPC Members Haldane and Cunliffe will speak on Tuesday and Wednesday, respectively.
EUR – The week kicked off with testimony from ECB President Draghi on monetary policy before the European Parliament. Draghi emphasised that the ECB was “ready to do its part” to support the economy. A similar tone was taken in January’s meeting minutes, released Thursday, which sparked additional speculation that ECB will expand stimulus in March after revealing that the ECB had considered preemptive action given the increase in global risks. The main releases of the week were German and Eurozone Economic Sentiment figures, which both fell but by less than expected. The German index fell from 10.2 to 1.0 and the Eurozone index from 22.7 to 13.6.
Key releases this week include Flash Manufacturing and Services PMI figures, German Business Climate, and Final Eurozone CPI. Dips are forecast for the Manufacturing and Services PMI figures, as for German Business Climate, which may offer the euro little support to start off the week. The M3 Money Supply is expected to remain unchanged at 4.7% up from a year ago, as it was in December. Final inflation in the Eurozone is expected to remain unchanged at 0.4%, while preliminary figures may show inflation rose 0.6% in Germany after dipping in December but fell again in Spain. Markets will also keep an eye on any renewed risk sentiment if oil prices or stock markets renew recent losses, and on any headlines from the G20 meetings that begin on Friday.
USD – Last week’s key figures were Friday’s inflation data. CPI m/m held steady, while Core CPI m/m rose 0.3% and CPI y/y and Core CPI y/y rose as well. These figures briefly strengthened the dollar against both the pound and the euro, and could provide support for the argument in favour of raising interest rates, although concerns remain about increased global risks and the pace of economic growth. The Producer Price Index was among the week’s positive releases, as was weekly Unemployment Claims, which fell to 262K from the previous week’s 275K. Fed comments last week largely took a more dovish tone, while the release of January’s Fed meeting minutes emphasised the increased risks posed by January’s financial market volatility.
This week’s highlight will likely be Friday’s second estimate of Q4 GDP. A downwards revision is expected, likely from 0.7% to 0.4%, with some calls for an even further cut to 0.3%. In the meantime, there are several releases to keep an eye on, including Durable Goods Orders, which are expected to return to growth, and Unemployment Claims. Any gains by the dollar earlier in the week could be off-set by a drop in GDP on Friday. In addition, markets will also keep an eye on comments from Fed members Fischer, Bullard, Powell, and Brainard. Further dovish comments may weigh on the dollar, while any more-upbeat tones following Friday’s inflation figures could instead offer the dollar some support.