And Breathe!

The UK Parliament has given itself a week-long holiday this week so there will be no meaningful vote until April 23rd at the earliest.

Theresa May, the Prime Minister, is still hoping that MPs will see the Withdrawal Agreement as the best option available for the UK to leave the EU in an orderly manner. Foreign Secretary Jeremy Hunt acknowledged on Friday that a second referendum cannot be ruled out despite the Government’s view that the result of the original vote should not be potentially overturned.

The financial markets will welcome the break from Parliamentary haggling over the best path for the UK’s departure from the EU although there is still the potential for the markets to be influenced since cross-party talks will continue. The two sides positions are still very far apart, so a breakthrough is seen as unlikely

There is a raft of significant data to be released this week which will give traders an opportunity to “get back to basics” and cast an eye over the effect of the various Brexit scenarios on the economy.

Tomorrow’s employment report will provide the Government with an opportunity to blow its own trumpet over record numbers of people in work although what the Government defines as “in work” differs from how the data has been made up historically. This skews the data somewhat. The more important number for the market is the continued rise in wage inflation which remains well above 3% and, more significantly, well above the rate of price rises.

On Wednesday, inflation data will be released. This is likely to show a further drop in consumer prices as energy and food prices have continued to fall. Inflation is now well below the Government’s 2% target which will be a relief to the Bank of England. The relative stability of the pound will provide a benefit to producer price data which is also released on Wednesday with the headline expected to have fallen to 2%.

Finally, retail sales data on Thursday is expected to have risen from 4% to 4.6% which will provide some cheer to high street retailers who have seen sales and profit margins fall over the first quarter.

The pound remained in its recent range last week, trading between 1.3133 and 1.3030 closing at 1.3080. The data is unlikely to push it out of that range and with a holiday-shortened week to look forward to, traders may take an opportunity to review the next likely move.

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Dollar pressured by the return of risk appetite

Financial traders, particularly those who trade markets daily, need volatility in order to be able to profit. That has been sadly (for them) lacking over the past few months with little prospect of any significant change as the global economy has entered a benign period despite concerns of a slowdown in activity.

Those concerns are countered by a feeling of optimism that there is a realistic chance that China and the U.S. will manage to agree on a deal over trade which has seen entirely pointless tariffs added to imports from both sides.

The U.S has a concern over China dumping cheap goods but more importantly, trying, by fair means or foul, to gain access to sensitive technical sectors of the market.

With the Fed now seemingly side-lined, it is difficult to say where the next major event is coming from. However, experienced traders will be aware of not being sucked into a false sense of security as there is often bad news lurking “just around the corner”.

As hopes of a trade deal grow, risk appetite is returning to the market, with currencies which traditionally rely on a healthy Chinese economy, for example, the Australian and New Zealand dollars, gaining. They are both improving at the expense of the greenback.

Industrial production and retail sales data are due for release in the U.S this week with neither number likely have any major effect on the dollar. Industrial production should increase by around 0.3% after a flat month in February, while retail sales are expected to have grown by 0.7% in March having seen a fall in February, mostly attributed to bad weather.

The dollar index traded between 97.38 and 96.74 last week and will remain in that range without a significant driver to add momentum. Traders are undecided over the direction for the currency as they are getting very little advance guidance from the Fed.

Activity indexes to confirm the ECB’s dilemma

The European Central Bank at its most recent meeting came as close as it ever has to acknowledging that it does not have the tools at its disposal to reverse the current slowdown in economic activity. Mario Draghi, the ECB President, even tried to divert attention away from his own issues by commenting on his concern over the independence of the U.S. Federal Reserve, something that is frowned upon among the Central Banking fraternity.

This week, activity indexes will be released for the entire Eurozone. They are unlikely to make pleasant reading for Sr. Draghi and his colleagues. Already weak manufacturing activity is likely to remain around 47.5. This is a significant pointer towards a recession in the region.

Inflation will continue to be subdued despite Draghi’s assertion that it is on the verge of moving higher. The only bright spot for the economy will be an increase in construction activity.

There are growing concerns about the Italian economy which is slowing more rapidly than had been expected which will add to pressure on its debt to GDP ratio and budget deficit. IMF estimates put growth at just 0.1% this year. This has been slashed from a previous projection of 0.9%. Debt to GDP is expected to grow from 132.1% to 134.4% next year and the budget deficit from 2.4% to break the 3% ceiling.

The single currency remains under pressure but is managing to cling to support (for now). There is significant support between 1.1200 and 1.1220 but should there be further bad news either from the data or the wider economy a severe test of that level is very likely.