Morning Report: 26 January 2016

26th January 2016 By: Ranko Berich

GBP The week soured early for sterling, as the pound once again began to sell off yesterday, amid further declines in crude oil and equities. The Confederation of British Industry reported its Industrial Order Expectations Index had fallen further into negatives, indicating falling expectations of further businesses among the surveyed manufacturers. Today at 10:45 GMT, Bank of England Governor Mark Carney will testify to lawmakers on the latest Financial Stability Report. The UK’s property market is expected to be a major topic, in particular the buy-to-let market, which has been blamed for soaring costs of living, especially in London. The Bank of England is concerned that a rise in interest rates could have a disproportionately negative effect on buy-to-let investors, as they are not subject to the same affordability tests as owner-occupiers. Thus a hike in interest rates could potentially trigger a mass exodus of investors from the market, and a crash in housing prices. Alternatively, another risk is that investors may opt to further leverage themselves, increasing overall household indebtedness. The Treasury is currently consulting as to whether to hand the BoE’s Financial Policy Committee more powers over the buy-to-let market, so markets will be interested to see if Carney continues to paint his recent, rather nervous picture on the outlook for the UK economy.

EUR The euro was on the offensive yesterday, defying the release of poor fundamental data in the morning. German’s IFO Business Climate Survey index fell to 107.3, reflecting the lowest level of optimism among the surveyed businesses since June 2015. However with crude prices falling and risk-off dominating currency markets, the bad news meant little to the euro. Mario Draghi defended the European Central Bank’s recent decisions in a speech, saying that the ECB’s credibility depended on meeting its inflation target. The central bank president implied the ECB was more concerned with meeting its inflation target than meeting market expectations for its actions. Over the last seven years, the ECB has met its 2% price target for roughly 24 months.

USD USD is giving its usual two-track performance in a risk off environment this morning, gaining versus commodity currencies and sterling while weakening to safe havens such as the yen and euro. A number of data releases are scheduled for this afternoon. The monthly House Price Index will be released at 14:00, along with the similar, widely followed Case-Shiller House Price Index. At 14:45 GMT, monthly Services Purchasing Managers Index data will be released from research company Markit, followed at 15:00 by Consumer Confidence data from the Conference Board, and the Richmond Federal Reserve’s Manufacturing Index.

CAD Crude oil is once again below USD $30 a barrel, and the loonie is suffering as a result, although as of writing USDCAD remains well below the highs seen during the depths of last week’s oil rout. No Canadian data will be released today, meaning there is little reason to believe CAD will do anything except follow price action in crude markets.

UK News

  • Reuters. BoE’s Forbes says oil price fall allows “a bit more time” before rate rise: The latest fall in oil prices allows the Bank of England “the luxury of a bit more time” before deciding if the job market is tight enough to require an interest rate rise, BoE policymaker Kristin Forbes said in a speech on Monday.
  • Telegraph. No interest rate rises just yet, says Bank of England policymaker: Economist Kristin Forbes will say that a crucial assumption about how the economy works has broken down.