U.K. Budget Paints Upbeat Picture

Brexit concerns still plague pound

Yesterday’s spring budget, announced to the House of Commons by Chancellor of the Exchequer Philip Hammond, was positive in tone but was never going to light a fire under Sterling. Hammond painted a fairly upbeat picture of the economy, upgrading the official growth forecast for 2017 from 1.7% to 2%. This shift is not being borne out by the data released so far for 2017. The economy is predicted to grow at just 0.4% in Q1 with weaker than trend services sector activity.

The Chancellor was also reasonably sanguine about inflation (perhaps taking a lead from BoE Governor Carney). Whilst most analysts see inflation reaching 3%, Hammond announced a predicted peak at 2.4% in mid-2018.

The reaction of Sterling was fairly muted but vaguely positive. The pound opened a shade above 1.2200 and had been under pressure through the morning session, reaching a low of 1.2140 before recovering through the Budget address, gaining 0.25%, to close at 1.2170. The pound is in a new (lower) range while the market awaits official comment on triggering Article 50. There are strong orders to sell around 1.2220 which should provide a cap, while bargain hunters are looking to buy on any dip to 1.2120/1.2100.

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Dollar firmer following private sector jobs report

Sterling’s ability to hang on to its post-Budget gains was all the more impressive as the dollar gained following the release of the ADP jobs report in the U.S. This report is the traditional curtain raiser for the non-farm payrolls report. It is perhaps ironic that while the non-farm report has become less and less reliable over the past couple of years, the ADP tightened its parameters last October and the data has become more consistent.

The ADP signalled growth of 298k jobs in February, far higher than expectations, which anticipated an increase of 190k. This bodes well for tomorrow’s “official” non-farm report which is now likely to break 200k. However any sizeable adjustment lower of January’s data will raise a number of eyebrows, not least those of the FOMC.

The dollar index rallied by 0.1% closing in on its March high of 101.26. Against the individual components of the basket the dollar was mixed firming by 0.2% against the JPY and Eur but falling 0.1% against the pound.

Chinese inflation benign while factory prices remain high

Data released by China overnight reported that inflation fell by 0.3% against an expectation of a 0.6% rise. This left the YoY figure lower than expected at 0.8% against a previous 2.5%.

In such a huge economy accurate data is virtually impossible to find so traders tend to look at trends rather than actuals which gives a more stable outlook for the world’s second largest economy. The efforts of the PBoC to stabilize the currency appear to be working no matter what the U.S. President may think, say or tweet.

Today’s data releases place spotlight on Eurozone

Today, there is a meeting of the ECB Council, followed a press conference where the President Mario Draghi will certainly be asked about the long term direction for interest rates in the region.

Despite concerns over the fragility of the recovery following the financial crisis, there are worries over the inflation outlook, particularly from Germany. A hawkish tone is likely from Draghi but he will be aware of his duties to all the members of the single currency and will shy away from the advance guidance so liked by the FOMC and BoE.

Political developments in The Netherlands and France will also cloud the ECB’s judgement. Rational consideration should lead to conclusion that there will be a multi-party coalition in The Netherlands, whilst in France, the left / right, left / right, nature of French politics will see the socialists of President Hollande removed to be replaced by a right of centre Conservative Government run by either Francois Fillon or, more likely Emmanuel Macron. Of course black swan events have surrounded many recent elections, so a victory for Nationalist/Populist National Front contender Marine le Pen is not out of the question.