Daily Market Brief 20 Mar 2017

Pound Braced for major data

March 20th: Highlights

  • Inflation / Retail Sales / Producer Prices due tomorrow
  • Eurozone rate hike rumours continue
  • French election polls boost Euro

Dissenting voice still driving sterling

Last week saw the first dissenting voice at an MPC meeting in nine months. Kristin Forbes is a renowned hawk, but she is both leaving the committee in a couple of months and has never been shy about voicing her views.

It is odd that traders take note of Kristin Forbes’ comments and vote even though they do not believe a rate hike is imminent or necessary.

The pound has held its gains from last week against a weaker dollar, trading a narrow band between 1.2396 and 1.2379. There is a Japanese holiday today which has led to a slow start to the week.

Foreign exchange is a market that is driven by more factors than any other. It ties most other asset classes together. Emotion and sentiment are two of the major drivers and thus, currencies do not always follow the most obvious path.

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Bundesbank driving inflation concerns

Being a member of the European Central Bank Managing Committee is not a job everyone would want. Presiding over 19 economies with differing needs to stitch together a viable and lasting monetary policy is not for the faint hearted! Some of those 19 states are more vocal about their needs than others and, thus, tend to have greater influence.

Germany is the most vocal of all. The Bundesbank pronounces on its inflationary fears and traders immediately think of a rate hike. As a result, today’s Bundesbank Monthly Report will not only reinforce it fears for inflation in Germany, but also for the whole Eurozone.

Several the member states are used to far higher inflation than the 2% target the Bundesbank has managed to persuade the ECB to adopt and for this reason adopt a more sanguine approach.

In the manner of Sterling traders, those dealing in the single currency have allowed an even more unlikely possibility to drive them. The Euro is trading near to its recent high at 1.0780 but since anything above 1.0820 has attracted major selling, it is unlikely that traders have not just the will but also the inclination to test that resistance.

French election still on a slow burn

The first-round ballot in the French election is still four weeks away. Now that the Dutch election has taken place and the EU has breathed sigh of relief, speculation can begin about the chance that the, more politically volatile, French will lurch towards nationalism/populism. In the latest opinion poll, Marine le Pen, the right-wing candidate, is neck and neck with centrist/reformist Emmanuel Macron.

These two are likely to contest the final run-off on May 7th with Macron the probable winner. This has provided a further boost to the Euro since Le pen’s platform is anti-EU and anti-Euro.

Tonight sees the first televised debate. These debates have become ubiquitous in elections in the major economies and the outcomes play an important role in shaping voter’s opinions.

Over the next month, euro volatility is likely to increase. Polls may say one thing but sentiment and fear will drive markets. Since it is likely that Le Pen will contest the final run-off, that very fact could be enough to see a major correction in recent Euro gains.

Plenty of “jaw-jaw” from FOMC Members this week

There will be no less than nine speeches from FOMC members this week. They tend to present a united front and so nine votes of confidence in not only the rate hike but also the three-hike strategy can be expected.

Eight speakers will speak in general terms about the economy but the ninth, Fed. Chair Janet Yellen, will provide advance guidance. She will want to present a “balance of risks” approach and should she lean towards a “four hike” strategy, then the dollar will resume its march higher.

U.S. data releases this week will provide further evidence of the health of the U.S. economy. Producer prices will show continued expansion with services outstripping manufacturing. In due course, we will get some clarity on how the President means to increase growth and productivity in the manufacturing sector and therefore the FOMC remains cautious in its outlook.

This week’s events of note

  • U.K.: House Price Index – An indicator of the confidence in the consumer market.
  • Germany: Bundesbank Monthly Report – More Griping about inflation. Hands firmly tied.
  • U.S.: Chicago Fed. Chair Speech – First speech since hike. Possible start of next advanced guidance.

  • Australia: RBA Minutes – Rates have bottomed. May mention the timescale for tightening.
  • U.K.: Retail Sales – Is the consumer still prepared to support the economy?
  • U.K.: Producer Prices – Following last month’s monumental 20.5% increase a slightly lower number expected as Brexit fall in GBP has fed through.
  • U.K.: Consumer Price Index – What did Ms Forbes see that the others missed?
  • Japan: BoJ Minutes – How does the Central Bank see the outlook for inflation?

  • Eurozone: Non-Monetary Policy Meeting – Bit like a footballer being offside but not interfering with play, what do they discuss if not monetary policy?
  • New Zealand: Central Bank Meeting – Rates were cut in November. There is no inflationary pressure and the currency performing well. No change expected.

  • Eurozone: ECB Economic Report – More fantasy about the need to consider tightening monetary policy as inflation starts to pick up.
  • U.S.: Fed Chair Yellen Speech – Justification of interest rate hike (were one needed) and a chance to wind up the President.

  • Eurozone: Manufacturing and Services Indexes – Still seeing expansion but patchy outside Germany.
  • U.S.: Durable Goods Orders – A barometer for big ticket items. Healthy growth expected but watch for revisions to previous months.
  • U.S.: Manufacturing and Services Indexes – A rare event globally, manufacturing stronger than Services but only because they exported Manufacturing earlier than the rest.

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.”