Morning Report: 14 February 2017

14th February 2017 By: Ranko Berich

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GBP.  Sterling remained fairly buoyant against USD yesterday, and has opened this morning on the front foot with further advances. Today’s 09:30 GMT release of inflation data stands out as one of the most important events of this month’s calendar for sterling. Markets are expecting a continued uptick in the data, largely driven by rising import prices due to the weakened pound in the second half of last year. The release is of central importance the outlook for policy normalisation- read, interest rates finally starting to rise again- from the Bank of England. Last week’s inflation report emphasized that although the BoE was willing to look through a certain amount of inflation due to sterling weakness, there were limits to this tolerance. A particularly sharp increase in broad inflation, therefore, could end up adding additional support to sterling, which has rallied since Theresa May set out the government’s objectives in Brexit negotiations last month.

EUR.  The euro weakened further to USD and GBP yesterday, as new economic projections for the European Union were released by the European Commission. Aside from a notable (and perhaps slightly embarrassing) upwards revision to the forecast for the UK, the forecasts predicted the eurozone would remain in fairly robust growth of 1.6% year on year. The forecasts also warned that France would fall foul of budget deficit rules. Multiple headline eurozone data releases are scheduled this morning, with German Gross Domestic Product growth already released at 0.4% quarter on quarter, and Italian and Eurozone GDP due at 09:00 and 10:00 GMT respectively. The eurozone GDP release will be followed by the widely watched ZEW Economic Sentiment survey.

USD.  USD is weaker against GBP and JPY this morning, but is up against the euro, after a fragmented 24 hours that saw the weighted USD index DXY remain almost flat from open to close yesterday. Plenty of political headlines are in the news, notably the resignation of National Security Advisor Michael Flynn, which represents another blow to President Trump’s fledgling administration. However, in the absence of any material hints about fiscal or trade policy, USD has been unaffected. Today at 13:30 GMT the US Producer Price Index will be released, but the afternoon’s main event will be Federal Reserve Chair Janet Yellen’s testimony to lawmakers from the Senate Banking Committee, where she will present the Fed’s latest Monetary Policy Report. The testimony will be examined closely for hints as to the likelihood of a rate hike in March, and lawmakers are likely to try to bait Yellen into elaborating how the Fed would respond to expansionary fiscal policy from the Trump administration, making for a very relevant event for USD. Yellen will testify at 15:00 GMT.

CAD.  The loonie held as firm as Justin Trudeau’s handshake with Donald Trump yesterday, despite crude oil prices falling as traders finally began to second guess the massive build up in long positions reported weekly ICE data. The two leaders announced no substantive measures on trade or foreign policy, which is notable due to the Trump administration’s rhetoric about renegotiating NAFTA, the trade agreement that governs trade between the two nations. No Canadian data will be released today, placing the focus on tomorrow’s release of Manufacturing Sales data.