Morning Report: 15 April 2016

15th April 2016 By: Ranko Berich

GBP Yesterday the Bank of England released its latest monetary policy decision, and minutes from the meeting. Expectations for a looser monetary policy were reasonably high, as markets argued that the UK could need some support from the central bank in order to reverse the impact that Brexit could have caused to the economy. The overall message from the Monetary Policy Committee minutes was more upbeat than expected, as the minutes stated that the MPC expects interest rates to be increased, rather than decreased, during the forecast period. These remarks give a good idea of what can happen to sterling if the UK decides to remain in the European Union, in that it could trigger a significant rally in the pound.

EUR The euro is broadly lower this week traders continue to take profit after the rally of recent weeks. Fundamentals in the eurozone this week have not helped either, with yesterday’s data showing that inflation levels remained flat in March. The data supported the cautionary tone from various ECB officials over the past week, who stated that monetary policy could be “recalibrated” if inflation do not recover in the European Monetary Union soon.

USD Support for the US dollar remained yesterday, with a positive jobs report counteracting the release of weaker-than-expected inflation data in the US. The simultaneous releases perfectly highlighted the Federal Reserve’s current conundrum: inflation remains at a tepid 0.1% month on month growth rate, despite a tightening labour market. Previously, the Fed had taken a more philosophical view, stating that they were willing to hike interest rates if the theoretical conditions for rising inflation were in place. However, four months after the Fed’s initial interest rate hike last December, the economy is still failing to show any signs of the inflation that was assumed to be inevitable. As a consequence, the voting members on interest rate setting committee have been sounding a far more cautious tone over recent weeks, and if the data continues at its current pace, this is likely to weigh more heavily on the dollar over coming months.

CAD The loonie has strengthened against most of G10 currencies this week due to the surprising increase in employment in non-resource sectors last week. It has also benefitted from an optimistic Bank of Canada, which sent a positive message to the markets, despite not altering monetary policy. Lastly, an increase in crude oil prices ahead of this weekend’s OPEC meeting, where markets are anticipating an agreement to freeze oil production, is also helping CAD. However, expectations for a control in production could be inflated as current levels of oil supply are significantly above of oil demand, which could, ultimately, prove to be counterproductive for global oil prices. Manufacturing sales are released in Canada today at 13.30 BST.

UK News

  • Reuters. In London, Obama to wade into Brexit debate ‘as a friend’. President Barack Obama will put himself in an unusual, and risky, position next week in London: smack-dab in the middle of the heated British debate over whether to remain part of the European Union.
  • The Guardian. UK economy is using low interest rates as life support. It can’t end well. The latest news for trade and manufacturing speaks volumes about the state of the UK economy: weak, unbalanced and highly dependent on continued low interest rates to keep it going.