Morning Report: 1 February 2017

1st February 2017 By: Ranko Berich

GBP Sterling dropped sharply yesterday after the Bank of England’s money supply data showed the largest contraction since October 2015. The jump in market-implied inflation expectations in the UK suggest that markets are becoming more sensible to monetary policy related mechanisms, and the drop in money supply, although slight, rises question marks about the future of the Bank of England’s future policy decisions. The British central bank meets on Thursday and will publish its latest inflation forecasts. If the BoE revises inflation forecasts to the upside, the likelihood of an interest rate hike could be quickly priced in and give a boost to sterling. This morning’s release of Markit’s Manufacturing Purchasing Managers Index has seen reported output jump sharply, but also the largest month on month increase in input costs in the survey’s 25 year history.

EUR The euro jumped yesterday after remarks coming from the other side of the Atlantic Ocean. The US President, Donald Trump, and his Trade Chief Adviser, Peter Navarro, accused Japan, China and Germany of benefiting from an undervalued euro. As a result, the euro jumped across the board, rallying significantly against USD, and holding its gains this morning. In addition to the impact of Trump’s and Navarro’s words on the euro, fundamental data in the Eurozone has been strong. Inflation reached multiyear highs in Spain and in the Eurozone as a whole (3.0% and 1.8% respectively). This morning’s Markit Purchasing Managers Indices also reflected strong increases in reported output in Spain, France, Italy and Germany.

USD Donald Trump seems to be trying to talk down the dollar, and he has been, so far, quite successful at it. Trump stated yesterday that Germany was deliberately benefiting from an undervalued euro, causing a rally in the single currency against the USD; whilst also attacking the Bank of Japan by commenting that the country has enjoyed a devalued currency for many decades. It appears that Donald Trump will not hesitate to comment on FX markets neither, raising the prospect of further tweet or comment driven volatility. The Federal Open Market Committee meets today. Although it is not expected to change rates, the Fed can be expected to begin laying the ground for a likely rate in March in case they believe inflation risks are increasing.

CAD Trump’s comments on currency also gave some additional momentum to the Canadian dollar which reached a 4-month high yesterday against the USD. Fundamental data also supported the loonie after November’s GDP data increased above expectations and the raw materials price index was shy of a 7-year high. No data will be released today.

UK News

  • Theresa May on track to pass Brexit bill as Labour angst deepens – FT. Opposition to Article 50 fades away at start of parliamentary debate. Theresa May is on track to win MPs’ approval to begin the Brexit process as opposition to Britain’s EU exit drained away at the start of an emotional parliamentary debate. The prime minister looked on from the House of Commons front bench as David Davis, Brexit secretary, introduced the bill that will allow her to invoke the Article 50 exit clause, declaring: “We are considering a very simple question: do we trust the people or not?”
  • Discounts drag on UK shop prices in Jan, pressure still building – BRC. January discounts dragged on British shop prices last month but cost pressures linked to the decision by voters to leave the European Union gathered steam, an industry survey showed on Wednesday. The British Retail Consortium (BRC) said shop prices fell 1.7 percent last month compared with a year ago after a 1.4 percent decline in December. “Fluctuations in the monthly figures belie an underlying trend of building cost pressures that are gradually feeding through from the fall in sterling combined with higher commodity prices,” said Helen Dickinson, chief executive of the BRC.