18 Apr 2019: Benign inflation keeps Sterling in check

Benign inflation keeps Sterling in check

April 18th: Highlights

  • CPI remains below Government target
  • Eurozone trade balance surprises to the upside
  • Q1 GDP to provide a further clue on Fed stance

UK economy takes centre stage (for now)

Amongst the continued furore over Brexit, the UK economy has trundled along quite nicely so far in 2019. This week’s data has backed that view with employment remaining at or close to record highs despite no one in the market being fooled by the Governments tactics on jobs. Yesterday saw the release of inflation data which came in unchanged, as expected, at 1.9% in March.

Low inflation is a double-edged sword. On the one hand, it means that wages are rising at a net 1.5% which should be good for consumer confidence and retail sales (we will be able to judge for ourselves as the March retail sales data is released later this morning), but takes any pressure for a rate hike away from the Bank of England and will see Sterling under a little pressure or it would do in a Brexit free world.

With local elections in the UK just two weeks away the public will get a chance to vent their protests over the handling of Brexit. As with the UK’s departure from the EU, several scenarios are possible. There could be a mass boycott of the entire process (turnout is generally appreciably lower than national elections anyway). There may be a large swing towards independent candidates as a sign of anger with the two main parties. How the Conservative and Labour Candidates fare will also be closely watched. If the Conservatives do particularly poorly, it will see less pressure for a General Election. However, if the Labour Party does poorly, it will be a comment on the indecision within the Party’s ranks over a second Brexit referendum.

The market has remained in existing ranges over a holiday-shortened week and Sterling has been no exception. Yesterday, it traded between 1.3069 and 1.3028 versus the dollar although it has weakened somewhat versus the euro over the past few sessions. It reached a low of 1.1519 yesterday, closing at 1.1547.

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Eurozone data still not signalling a bottom for the economy

Confirming the fears of the ECB and Bundesbank, the Eurozone economy continues to drift lower despite yesterday’s encouraging report on trade which showed a surplus in February of a seasonally adjusted Eur 19.5 billion. This was better than market expectations and was significantly higher than the January data.

Today sees the release of Purchasing Managers Indexes for the entire region as well as a couple of the major individual economies.

It is expected that the indexes which are an indicator of future activity in the economy won’t have fallen dramatically as has been seen in the past few months. However, they won’t show any marked improvement either, remaining below 50 which signals a continued contraction.

Manufacturing activity in Germany is expected to have risen from 44.1 to 45 which means that activity in the Eurozone’s industrial powerhouse remains very weak. France won’t fare any better with activity there closer to flat, but still contracting.

Overall activity is expected to come in close to last month’s data at 47.5. Anything worse than last month will see the single currency drop to test medium-term support. Since the euro has been drifting lower, it is near to the recent lows and a poor number could set it off again on a path to the bottom of its longer-term range which has a base at 1.1200.

Yesterday, the single currency traded between 1.1324 and 1.1278 versus the dollar, closing at 1.1295.

Dollar awaits growth confirmation

It is a mark of a market that is unsure of its direction when analysts continually look forward to the next piece of data. It signifies that a picture is being built of what to expect going forward since what has already been released is inconclusive.

That is certainly the case with the dollar as the Holiday is just about upon us and traders take profit on their positions.

Next week sees the release of the “first cut” of Q1 GDP data. This is expected to show that the U.S. economy grew at between 2.1% and 2.3% between January and March. This is the same as the Oct/Dec quarter, which will give the President a further excuse to “bash” the Fed and its Chairman for being too hasty in hiking rates.

Trump’s condemnation of the Fed illustrates perfectly his lack of comprehension of the finer points of the economy since it was the President’s tax cuts and stimulus packages that led the Fed to be more cautious.

With Republican candidates now beginning to declare themselves for next year’s Presidential election, it can be expected that the present incumbent will “come out swinging” and may announce some (further) radical steps he intends to take should he be re-elected.

The dollar index remains mired in its recent short-term range. Yesterday, it traded between 96.82 and 97.12, closing at 97.02. It is unlikely to trade outside that range over the next week or so. If the GDP data is in line with expectations, it will tighten the Fed’s stranglehold on the market and lead to a stable Q2.

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.”