Daily Market Brief 15 May 2017

Sterling Shrugs Off Negative Factors

May 15th: Highlights

  • Bank of England confident over Brexit talks
  • Rate hike some way in the future
  • Prospect of Political Stability adds support

Brexit negotiations expected to proceed smoothly

The Bank of England in its Quarterly Inflation Report provided a surprisingly upbeat message on how it expects Brexit talks between the U.K. and E.U. to proceed. No doubt there is a risk of a disorderly exit with no agreement on any of the major points of contention.

Bank of England Governor, Mark Carney has said that the Bank hasn’t tried to consider the effect of a disorderly exit. He clearly believes that firstly that won’t happen and second if it did, the effect would be catastrophic. The effect would be felt far more widely than by the U.K. in isolation.

Commentators have noted that this is possibly an over-optimistic view given the tensions that have built between the two sides recently. It was always likely that as negotiating positions were developed the gulf would appear wider than it is but it remains to be seen how the initial talks will proceed.

The pound has recovered from the initial shock of the Bank of England’s apparently laissez-faire attitude to several issues. It fell to a low of 1.2850 late on Thursday before recovering its poise to regain the 1.2900 level.

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Higher Rates some way in the future

It is perhaps the Bank of England’s single acknowledgement of the issues facing the economy that it doesn’t see the need for a hike in rates until 2019. That is, however, the single most important “tool in the box”.

It is the relaxed attitude towards inflation that concerns the market the most. Carney wants to use rate hikes as reactive to any sign of overheating in the economy which, it is true, is some way in the future (if at all). While analysts, and at least one member of the MPC, expect them to be used pre-emptively to head off inflationary concerns.

The outlook for inflation has been lowered by both official and unofficial bodies over the past week. The NIESR, a well-respected research institute, sees inflation growing higher than the official expectation but has cut its peak forecast from 3.7% to 3.4%. The Bank of England raised its official inflation expectation to 2.8%.

The pound followed a similar pattern versus the Euro as against the dollar falling initially to 0.8490 before recovering a little to 0.8470.

Sterling supported by Opinion Polls

The latest polls of voting intentions in the General Election, published over the weekend, put the ruling Conservative Party on course for a massive 150+ seat majority in Parliament. This will provide Prime Minister Theresa May with a clear mandate to take a tough stance over the major points of contention in Brexit negotiations.

This has been the main factor supporting the pound as monetary policy and economic releases point to a slowing of the economy.

This week sees inflation, producer prices and retail sales data released. The inflation numbers will have been known to the MPC in advance so no surprise is expected there. Any weakness in retail sales will see a drop for the pound which should be short-lived as there is now strong buying interest around 1.2850 and above 0.8500.

North Korea continues to test missiles

Kim Jong-Un presided over yet another missile test over the weekend. This time the North Koreans managed to successively launch a mid-long range missile capable of carrying a “large scale heavy nuclear payload”.

The dollar last ground against the JPY as risk appetite was reined in but there is buying interest at and just below 113.00.

Industrial production and capacity utilization data will be released later this week which will need to at least match the March data to keep the FOMC on course for a rate hike next month.

This week’s events of note

  • China: Industrial Production – Stellar growth by global standards at more than 7% shows the expansion of the economy continues.
  • Eurozone: Greek GDP – An unusual starter but a contraction of 1.1% shows the continuing problems of “one-size fits all”

  • Australia: RBA Meeting Minutes – Is a rate hike in Australia as far away as one in New Zealand is?
  • U.K.: Inflation data – Producer and retail prices continue to rise despite the BoE’s calming words.
  • Eurozone: Q1 GDP – 1.7% YoY expected in contrast the Greeks.
  • U.S.: Industrial Production – A rise of 0.5% hardly likely to encourage the Fed too much.

  • U.K.: Employment data – Headline number below 5% a positive sign but wages growth of 2.3%-2.4% still worrying for the economy.
  • Eurozone: Inflation – Remaining below 2% despite howls of protest from Frankfurt

  • U.K.: Retail sales – Is the consumer continuing to bail-out the economy. Last month saw a missed step, The BoE will be keen to see stronger data.

  • And breathe: No major data releases – A chance to reflect upon a moderate week for data.

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.”