Weekly Analysis 18.04.2016

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The pound was able to take back some ground last week, partially on the back of an above-forecast inflation release, while underwhelming inflation and industrial production figures from the US added to the uncertainty regarding the likely date of the next Fed rate hike. Final CPI figures confirmed that inflation remains well below target in the Eurozone. Key items on the calendar this week include Fed comments on Monday, UK wage and employment releases on Wednesday, and the ECB meeting and UK Retail Sales on Thursday. Ongoing questions, including the future of oil and Brexit uncertainty, will continue to occupy markets’ attention.
The pound received a boost last week after annual CPI inflation rose more than forecast to 0.5% in March from an under-forecast 0.3% in February. Core CPI was also higher than expected, rising to 1.5%. The Bank of England has kept monetary policy accommodative at least in part to stoke inflation, which nevertheless remains well below the BOE’s target rate of 2%. While the above-forecast figure offered the pound some support mid-week, Sterling weakened again as attention turned to Thursday’s BOE meeting. While the meeting was relatively a non-event, the BOE did express explicit concerns over the risks posed by a potential Brexit, which likely weighed on the pound, particularly as there were no other major-impact UK releases at the end of the week. The pound ended the week up against the euro and slightly higher against the dollar.
This week’s key releases include Retail Sales, wage growth, and the Unemployment Rate. Average Earnings are forecast to hold steady at 2.1%, while the Unemployment Rate is also forecast to remain unchanged at 5.1%. If the figures disappoint expectations, the pound may weaken, while a surprise to the upside could instead strengthen the pound. Retail Sales, out Thursday, are forecast to decline by less than previously following an unexpectedly strong gain in January. Markets will also keep an eye on comments from BOE Governor Carney in testimony before the Lords Economic Affairs Committee for any forward guidance. Any dovish comments or discussion of Brexit risks could weigh on the pound.
The economic calendar last week was relatively quiet. Highlights included an upwards revision to annual inflation in March from -0.1% to 0.0%, while core inflation remained unchanged at 1.0%. The euro weakened earlier in the week after Industrial Production fell 0.8% from February to March, more than expected, while February’s gain was downwardly revised to 1.9%. With relatively little out from the Eurozone last week, both the pound and the dollar were able to claw back some ground against the euro over the course of the week.
The main highlight this week is the ECB meeting on Thursday. While the meeting will likely spark less volatility than did March’s, as no additional stimulus measures are expected, markets will watch the meeting and subsequent press conference for any guidance as to the effectiveness of current policy and the outlook on inflation and interest rates going forward. As for the week’s economic releases, Economic Sentiment figures out on Tuesday are forecast to show improvement in sentiment in both Germany and the Eurozone as a whole, which may provide the euro with some support. Following Thursday’s ECB meeting, Friday’s releases include Flash Manufacturing and Services PMI figures from France, Germany, and the Eurozone. Increases in the indices are forecast, which could offer the euro some additional support heading into the end of the week, although any gains may be limited unless the release surprises to the upside.
After some initial weakness, the dollar took back ground against both the pound and the euro, despite a drop in Retail Sales and PPI, only to weaken again towards the end of the week as first inflation and then Industrial Production figures disappointed. GBP/USD peaked above 1.43 while EUR/USD peaked above 1.14. CPI m/m rose to 0.1% while CPI y/y fell to 0.9%, and Core CPI m/m fell to 0.1% while Core CPI y/y fell to 2.2%. Industrial Production declined 0.8%, more than forecast. As the Fed considers raising interest rates for a second time, it keeps track of a variety of factors, including whether inflation is on track to return to its 2% target rate and the strength of the domestic economy.
Comments from FOMC Members Dudley, Kashkari, and Rosengren on Monday start off the week and will provide markets with the last opportunity to gain insight into the Fed’s current thinking ahead of the rate-setting meeting on 26-27 April. While an April rate hike is unlikely, markets will look for any guidance as to the likely effect of last week’s under-forecast inflation and Industrial Production figures on the outlook for rates, including the chances of a June hike. Reduced expectations of a June hike or expectations of a more-dovish Fed could weigh on the dollar this week. Economic releases to keep an eye on include a set of likely mixed housing data, including Building Permits, Housing Starts, and Existing Home Sales, as well as an expected uptick in weekly Unemployment Claims and drop in the Philly Fed Manufacturing Index. If the releases are mixed as expected, the dollar may fluctuate this week but remain relatively weak as markets await the Fed’s guidance next week.


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