Sterling Faces Crucial Week

UK Inflation to continue to fall.

Since it reached a peak of 3.2% late last year, headline inflation in the UK has fallen steadily. In his remarks following the rate hike which took place in the first week of November last year, Bank of England Governor Mark Carney commented that the hike was needed since inflation wasn’t going to fall unaided.

It is generally accepted that the rate at which inflation has fallen since that time was accelerated by the hike but now the MPC stands on the cusp of a further hike and may struggle for justification

This week sees the release of inflation and employment reports for March with headline CPI expected to have fallen close to 2.5%. It is, however average earnings data, due for release tomorrow that is exercising analyst’s thoughts the most. The three-month average expected to reach 2.9%, confirming positive wage increases for the first time in over a year.

Economic data has been weak recently with production and future activity indexes below expectation. Positive house price data was offset by a fall in market activity and with a rate hike looming any improvement may be a while coming.

The pound rallied to significant levels on Friday reaching a high of 1.1590 versus the single currency before falling back a little, while versus the dollar it closed in on the post-referendum high before closing at 1.4241.

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Syrian actions largely ignored.

President Trump’s typically gung-ho “mission accomplished” comments following U.S. French and British strikes on suspected Syrian poison gas plants on Saturday have led traders to believe that the attacks were a one off, providing a message of intent should Syrian President Assad consider further use of banned weapons.

The effect of the strikes has seen the dollar firm a little overnight reaching 89.88 but overall the effect has been minimal. It is hoped that the “surgical” nature of the action will see tensions fall a little since Russia should have no reason to respond, militarily at least.

Any improvement in risk appetite will allow the market to start to consider the economic activity that should be a longer-term driver for currency markets rather that the short term, “knee-jerk” responses that have been taking place recently.

Several FOMC members are due to make speeches this week. It will be the first time that so many have had the opportunity to voice their opinions on inflation and the path for interest rates since new Fed Chair, Jerome Powell took over a couple of months ago. It is assumed that the majority of FOMC members back Powell’s pragmatic view, but any signs of a more hawkish outlook may see the dollar firm as the idea of four hikes this year returns to the table.

Single Currency, Single voice

The Euro continues to trade within the confines of a narrow range versus the dollar but continues to weaken considerably versus the pound. Given the likely outcome Brexit, economically at least, this is a surprising turn of events which may not be expected to last, being caused, in the short term, by a divergence of the interest rate differential.

This week’s inflation data for the Eurozone is expected to see the core headline fall to below 1% which will strengthen Mario Draghi’s case for monetary policy to remain unchanged and calls into question the comments of Austrian Central Bank President Ewald Nowotny last week in which he said that rates would be increased, and the Asset Purchase Scheme removed this year.

Inflation is showing absolutely no sign of rising and the most forward-looking indicators are also predicting a continued benign outlook.

The Euro traded between 1.2346 and 1.2307 on Friday as new drivers continue to prove hard to find.

The sheer volume of liquidity available provides the euro with a solid base that is without equal historically. As the currency and the entire Eurozone economy mature, it will take significant changes in perception to bring about any radical movement in the currency.