Morning Report: 18 April 2016

18th April 2016 By: Ranko Berich

GBP Despite strong inflation data and a relatively upbeat Bank of England interest rate report having helped sterling gain ground against almost all of its peers last week, the pound has already begun this week on the back foot, as the spectre of a ‘Brexit’ moves back in to focus. A raft of reports have recently indicated that uncertainty over British membership of the European Union is already having a harmful effect on the UK economy, with hiring in financial services falling 21% year on year, property prices at the high end of the property market falling, and a fifth of European companies recently surveyed stating that they are withholding investment until the outcome of the referendum is known. This negative sentiment is likely to be exacerbated by a UK treasury report due today, which is expected to warn of “permanent economic damage” that a vote to leave the EU would bring to the UK. With Bank of England Governor Mark Carney unlikely to deviate much from the Bank’s official statement last week when he testifies at the House of Lords tomorrow, and Public Sector Net Borrowing figures having been a consistent source of weakness for sterling over recent months, this is likely to be a tough week for the pound.

EUR After reaching the top of its eight month range last week, the euro is now also firmly retracing. The cause of consternation for the eurozone is a familiar one: Greece once again faces bankruptcy in July, and with its creditors seeking yet more austerity clauses attached to further lending, tensions are running high. However, if progress can be made this week, then the single currency is likely to quickly find its feet again, as Jens Weidmann, the President of the German Bundesbank, regains his vote on European Central Bank monetary policy at this week’s meeting. As the head of the central bank for the eurozone’s largest and strongest economy, Weidmann is both notoriously conservative and influential amongst his decision-making peers, and is seen as a key counterweight to more dovish policymakers, such as ECB President Mario Draghi. Furthermore, with Draghi now seemingly having lost his ability to be able to ‘talk down’ the euro in the absence of any actual policy moves, and with a recent spate of positive economic data from the currency bloc, for once this Thursday’s meeting is not being seen as a likely source of weakness for the currency.

USD Despite a sharp fall in oil prices this morning, as an OPEC-led meeting failed to secure a much-hoped-for cap on production over the weekend, the dollar has only been a marginal beneficiary. Historically, the US dollar and oil prices tend to have a close inverse relationship, however, despite oil tumbling by almost nine percent, poor economic data last week from the US continues to temper market enthusiasm for the greenback. After weak inflation and retail sales figures earlier in the weak, Friday saw the release of the Consumer Sentiment survey from the University of Michigan, which fell to a seven month low, despite expectations of a month-on-month rise. Although employment data continues to remain solid, with the falling oil prices likely to keep a cap on inflation levels over the medium term, the case for further interest rate hikes in the US seems to be slipping on an almost weekly basis. Today, the only event on the economic calendar for the US is Federal Reserve interest rate voting member William Dudley speaking in New York.

CAD In a testament to the improving sentiment on the Canadian dollar, despite a sharp selloff in crude oil this morning, the Canadian dollar has held up well against almost all its peers this morning. In fact, economic data has been so strong that markets are actually now starting to price in the possibility of an interest rate hike before year end in Canada, ending months of bearish speculation of further interest rate cuts. Although this week is quiet in terms of data releases for CAD, with inflation and retail sales on Fridaythe only scheduled releases of note, Bank of Canada Governor Stephen Poloz is due to speak in Ottawatomorrow, which could cause some movement on the loonie.

UK News

  • Reuters. UK economy faces permanent hit with Brexit – Osborne: Chancellor George Osborne said a vote to leave the European Union in a referendum in June would do permanent damage to the country’s economy, which he warned would be 6 percent smaller by 2030 than if it stayed in the bloc.
  • Reuters. UK rental property prices dip as tax hits, overall prices up: Asking prices for rental properties in England and Wales have fallen, hit by the introduction of a new tax, but prices in the housing market as a whole have continued their rise, online property listings firm Rightmove said.
  • Daily Mail. House prices jump £3,800 in a month to a new high as buy-to-let stampede unleashes wave of ‘trader-uppers’: House prices jumped £3,800 in April to hit another high as buy-to-let investors rushing to beat the stamp duty hike last month had a knock-on effect of energising the higher sectors of the market, new figures have revealed.