Morning Report: 20 January 2016

20th January 2016 By: Ranko Berich

GBP Yesterday was an eventful, and potentially fateful, day for sterling that saw the pound drop to its weakest levels against USD since 2009, surpassing 2010’s lows. At first it looked like sterling was set to rally, after monthly inflation data was generally better than expected. ONS data showed that prices had risen by more than expected in December, with the Core Consumer Price Index, which excludes energy prices as well as food, rising 1.4% year on year. The pound rallied slightly on the news, but this was cut short and reversed dramatically after Bank of England Governor Mark Carney made comments that were quickly interpreted as signalling that interest rates would not go up any time soon. Today’s newspaper headlines generally speak of a “dovish” speech, and the Governor did say that choice to not raise interest rates at the turn of the year was an obvious one. He also gave an admirably straightforward explanation for why monetary policy in the US and UK was diverging: the UK was a smaller, open economy more vulnerable to global low inflation, and that unit cost growth was not as robust in the UK as in the US. Of course, this is a response to economic conditions as they currently are. Should unit labour costs begin to rise in earnest and commodity prices bottom out, the Bank is likely to begin singing a different tune. Today’s Labour Market data, which is released at 09:30 GMT, is therefore critical, especially the Average Earnings Index.

EUR Another bout of overnight equity angst has proven to be a boon for the euro, which is up noticeably against USD and GBP. Yesterday’s data released were generally positive, with eurozone inflation rising 0.2% year on year in December and the important German ZEW economic sentiment survey rising from its previous level, reflecting a higher level of investor confidence. The only headline euro data released today was the German Producer Price Index, which unsurprisingly showed a massive 0.5% contraction in December.

USD Although the dollar recovered during the early hours of yesterday’s trading session, a new wave of risk-off sentiment sent the dollar down against funding currencies such as Japanese yen, Swiss franc and the euro, while gaining versus commodity currencies (NZD, AUD, CAD), as well as sterling. No fundamental data supported these gains as yesterday’s calendar included no major releases. December CPI will be released today at 13.30 GMT, alongside monthly Building Permits and Housing Starts. Given how sensitive USD seems to be to any suggestion that the Fed will hold off on any further rate hikes this year, the data will be even more closely watched by markets than usual.

CAD Yesterday crude oil prices registered the biggest rally of the year so far, advancing from multi-year lows to above $30 a barrel. The loonie enjoyed a break from its disastrous beginning of the year, although this was short lived. A new wave of risk-off sentiment swept the markets around midday, as crude oil prices resumed this year’s dominant downward trend. These events put the spotlight firmly on the Bank of Canada’s rate decision and press conference today, at 15:00 and 16:15 respectively. Half of the economists polled by Bloomberg expect interest rates to be held, while the other half expects a cut. The BoC has proven that it is willing to move proactively in the face of shocks to the economy, so a rate cut today seems to be a distinct possibility.

UK News

  • FT. UK not strong enough for rate rise, says Carney: Britain may still be sitting close to the top of the international growth table for advanced economies, but in a speech on Tuesday Mark Carney, the governor of the Bank of England, was clear the economy is too weak for him to contemplate raising interest rates from crisis-era lows.
  • Reuters. UK inflation was zero in 2015 despite December lift : British inflation edged up to an 11-month high in December after a spike in airfares, but prices for 2015 as a whole were flat for the first time since records began in 1950, putting the Bank of England under no pressure to raise rates.