Daily Market Brief 12 Apr 2017

Unchanged Inflation Neutral for Pound

April 12th: Highlights

  • JPY gains on USD, GBP & EUR as Geopolitics dominate
  • U.K. inflation steady but PPI points to further rise
  • Shock as Left Wing Candidate gains in France

Concerns over Syria, North Korea bring lower dollar

There was a continuation of the currency markets flight to safety yesterday as the Japanese Yen rose against all major currencies. Against the dollar, the Yen rose to 109.35, its highest since the U.S. election. The pound and euro also suffered against a surging Yen hitting 136.60 and 116.02. Both multi-month lows.

President Trump repeated his warning to North Korea about its continued provocation, again saying that North Korea was “looking for trouble” and the U.S. would solve the problem with or without China’s help.

This drew a stinging response from North Korean President Kim Jong Un who threatened a nuclear strike on the U.S. should the threat from the U.S escalate. It is doubtful whether North Korea yet has the capability to launch a missile that can reach the U.S., but that isn’t really the point of these exchanges.

The Australian Dollar which is the “risk on” opposite of the Japanese Yen suffered yesterday falling to a three-month low of 0.7475 before recovering a little to reach 0.7490

The price action surrounding the dollar should prove temporary unless there is a major escalation of tensions. Fundamentally, the U.S. economy remains on an upward curve in contrast with other G7 nations still struggling to find growth despite inflationary pressures.

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U.K. inflation picture a little clearer

There was no need to call upon the BoE Governor yesterday to calm nerves as lower airfares and fuel costs led up an unchanged inflation rate.

Inflation remains above the Government’s target of 2% but according to the BoE, it remains under control. That remains to be seen with some analysts calling for 4% by year end. Governor Carney is more of a dove, seeing the peak at 2.7%.

Imported inflation derived from a lower pound is still feeding into the rate. Producer Prices which show the level of inflation at the factory gate rose by 17% year on year on a non-seasonally adjusted basis. Although this is an improvement from the past two months it still predicts a rise in inflation in the coming months.

Rather fortuitously, there is no MPC meeting in April. The next is on 11th May which coincides with the release of the Quarterly inflation report. There will have been a further release of inflation data by then too, so the hawks like Kristin Forbes, attending her penultimate meeting, will have every opportunity to use data to back their votes for a rate hike. The vote on a rate hike will be interesting not because there will be a majority for a hike, but to see who sides with Ms Forbes in calling for one.

French outsider “coming up on the rails”

By the time the MPC meets again, France will have a new President. French centrist Emmanuel Macron and far-right leader Marine Le Pen clung on as frontrunners in France’s tight presidential race on Tuesday, but the unpredictable outcome is pushing some pollsters to calculate the most extreme runoff scenarios.

Jean-Luc Melenchon, a far-left veteran who for most of the campaign has been dismissed as a no-hoper surged into the top four and lies just a few percentage points behind the leaders. The Government of Francois Hollande appeared to be about to be consigned to the rubbish tip of history. However, given the unpredictability of French politics, the socialist flame still flickers.
It is difficult to say how Melenchon could split the voting for Macron, Fillon and Le Pen but the renewed uncertainty is sure to bring a wave of volatility to the Euro.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”