Morning Report: 24 March 2017

24th March 2017 By: Ranko Berich

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GBP.  Sterling fell overnight and continues to weaken this morning after Gertjan Vlieghe, member of the Bank of England’s Monetary Policy Committee, said in an interview with The Times that higher inflation does not mean higher interest rates, unless it is accompanied by evidence of wage growth. Vlieghe explained that the inflationary pressure that the UK is now facing is the result of sterling’s depreciation, and is likely to be transitionary. Vlieghe’s comments were of a similar tone to those made by his colleague Ben Broadbent, who declared earlier this week that he is not seeing any material pressure on wage growth. No data is expected to be released today and sterling could keep trading on the BoE’s tone.

EUR.  The euro is rallying at the time of writing after Eurozone survey data showed the strongest output growth in 6 years. German manufacturing PMI jumped to a 6-year high of 58.5 in March, smashing estimates of 56.2. French services PMI also jumped to multi-year highs of 58.3 against expectations of 56.6. The data reflect the rapidly improving situation of the euro area in general, which now looking at its best quarter of the last six years.

USD.  The dollar has somewhat recovered overnight after the Trump administration delayed voting on the healthcare reform. The vote, which was expected to happen last night, was postponed until today because Republicans of the Freedom Caucus, a hardline conservative group in the House of Representatives, did not reach a deal with the President that would provide enough support for the bill to be passed in Congress. Mark Meadows, head of the Freedom Caucus, indicated that great progress had been made by Trump, but the Republican party still remains a few votes short. The White House delayed the vote until today, indicating they are confident the bill will be passed. Core Durable Goods orders will be released at 12.30 GMT.

CAD.  USDCAD is currently at levels comparable to the start of the week, after the volatility in the middle of the week appears to have settled down over the course of yesterday’s session. Broad USD weakness has meant that the loonie has been resilient to this week’s falls in crude oil prices. Today at 13:30 GMT, Canadian inflation data will be released, and is expected to moderate somewhat after the sharp 0.9% month on month jump seen in January.

UK news

Reuters: British retail sales suffer biggest squeeze in nearly seven years as inflation bites. British retail sales shrank at the fastest rate in nearly seven years during the past three months, despite a pickup in February, adding to signs that a major driver of Britain’s economy is faltering after last year’s Brexit vote. Major clothing retailer Next (NXT.L) underlined the shift, saying it was “extremely cautious” about its prospects, partly due to higher inflation, after reporting its first fall in profits since 2009.

The Times: Inflation doesn’t mean rate rise, Bank chief says. Gertjan Vlieghe said he would need to see evidence of strong wage growth before voting for a rate rise. A dovish member of the Bank of England’s monetary policy committee said a rise in inflation would not make him consider raising interest rates. Gertjan Vlieghe believes that much of the inflationary pressure is the result of sterling’s devaluation and the consequent rise in prices of products such as fuel and food. He expects inflation to head towards 3 per cent by the end of the year before starting to fall