Morning Report: 17 September 2015

17th September 2015 By: Ranko Berich

GBP Sterling had a great session yesterday, rising more than a percentage point against USD, off the back of strong wage growth and some comments from the Bank of England’s Mark Carney. Yesterday’s data showed unemployment falling back down to 5.5% in July, while the Average Earnings Index, the UK’s main measure of wages, rose 2.9% year on year. The labour market is continuing to perform well, and under normal circumstances it would be fair to assume that monetary policy would soon tighten in order to head off an inflationary spiral. However, the BoE is not certain to follow this line of thinking under current economic circumstances: inflation remains completely stagnant, with this week’s data showing Core CPI rising just 1.0% year on year. The BoE has indicated it’s likely to wait for a clearer signal that higher wages will filter through to inflation. Today’s Retail Sales figures at 09:30 BST are unlikely to have as large of an impact as Average Earnings, unless they deviate significantly from expectation.

EUR The euro at first looked like weakening yesterday, but a quick reversal of fortunes against USD ensued with the release of some slightly soft data in the United States in the afternoon. Eurozone inflation data fell short of expectations yesterday. The headline Consumer Price Index rose only 0.2% year on year, while the Core CPI, which excludes food and fuel, rose just 0.9%. The eurozone’s economy remains in a delicate state, broadly speaking, and yesterday’s data did nothing to reduce the possibility of further easing action from the European Central Bank.

USD USD may have softened yesterday after some slightly soft data, but only once thing matters in global markets today: this evening’s releases from the Federal Open Markets Committee. The Fed will release its latest economic projections, together with a statement, and the all-important Federal Funds Rate, at 19:00 BST. A press conference from Chair Janet Yellen will follow at 19:30. For the first time in years, this Fed meeting is the first where there is a real, credible chance of rates rising. The arguments for and against rate hikes now are numerous and well balanced, but the debate essentially comes down to how much confidence the FOMC members have in the strength of the US economy and in the outlook for inflation. The presser following the evening’s announcements will be the most closely watched financial event this year, as markets attempt to decipher the balance of opinion among FOMC members. Even if no change is made to the Federal funds rate, USD could still go either way. A hawkish press conference, for example, would likely to see USD strengthen. A number of releases are scheduled for the afternoon, but may end up having limited impact given the importance of the FOMC. They are Building Permits, Unemployment Claims, the Current Account and Housing Starts at 13:30 BST, and the Philly Fed Manufacturing Index at 15:00.

CAD Like all markets, CAD trading will be in thrall of tonight’s FOMC meeting, and yesterday’s CAD gains could be gone in seconds if the Fed chooses to hike interest rates. Yesterday’s data releases showed the upside of the weaker Canadian dollar, as Manufacturing Sales rose a whopping 1.7% month on month in July. CAD’s modest rally yesterday was helped along by diminishing crude oil inventories in the United States, which shrunk after two weeks of expansion.

UK News

  • Reuters. UK pay rises at fastest pace in more than six years: British wages grew at their fastest rate in more than six years in the three months to July, adding to signs that a first interest rate hike by the Bank of England is approaching.
  • Reuters. UK households less sure about BoE rate hike in next six months: British households think the Bank of England is slightly further from raising interest rates than a month ago, according to a survey that reflects the cautious tone of the central bank’s governor about when it will make its move.
  • Guardian. Bank of England edges closer to first interest rate rise in nine years: Two monetary policy committee members tell MPs increase is needed soon but governor still favours wait until end of year.