Morning Report: 16 January 2017

16th January 2017 By: Ranko Berich

GBP Ignoring last October’s “flash crash”, sterling traded at its weakest level against the US dollar in more than 30 years this morning. The weakness stems from reports that Theresa May will state in Tuesday’s speech that she is prepared to make a clean break with the European Union if a favourable exit agreement cannot be reached. May commented earlier this month that she was not interesting in keeping “bits” of EU membership, but the weekend’s reports in the government friendly Telegraph newspaper offer further confirmation that Brexit negotiations are likely to get off to a bruising start for the pound. The Telegraph article also outlined some aims for the government including full independence from the European Court of Justice, and full control of Britain’s borders. Price action on the way down was not as choppy as during Octobers’ flash crash, indicating that liquidity was solid, and the moves represented a shift in a number of participants opinions on sterling’s value as opposed to a low liquidity rout of the sort seen last year. The pound has stabilised slightly since this morning’s drama, but remains significantly weaker than Friday’s close. May’s speech on Tuesday therefore stands out as the single most important event for sterling this week, despite a number of important releases such as the Consumer Price Index on Tuesday and labour market data on Wednesday. Today at 18:30 GMT Bank of England Governor Mark Carney will speak at the London School of Economics.

EUR Like other major currencies, the euro capitalised on this morning’s sterling rout, but saw less movement against the US dollar. Friday saw the release of the German Wholesale Price Index, which rose a whopping 1.2% in December, compared to a year ago, suggesting rising cost pressure in the eurozone’s most important economy. Today at 10:00 GMT eurozone Trade Balance data will be released, and later in the week on Thursday the European Central Bank will announce its latest policy decision and give a press conference.

USD As with GBP, politics is the only game in town at the moment for the US dollar. Friday saw subdued trading, with markets barely reacting despite a firm print on the Producer Price Index. The Wall Street Journal published an interview with President Elect Trump, who offered little additional detail on whether the US economy is likely to see fiscal stimulus this year, though he did make a point of criticising the US dollar’s current strength. Attention will be very firmly focused on Trump’s inauguration speech this Friday, where the prospect of fiscal stimulus and trade policy may be discussed. Today is Martin Luther King day, and no data will be released. Later in the week, Consumer Price Index data will be released on Wednesday, ahead of Trump’s inauguration speech on Friday.

CAD After weakening on Friday, the loonie has stabilised somewhat against USD overnight. This will be a busy week for Canadian economic data, that may take the focus away from crude oil prices. Wednesday will see the release of the Bank of Canada’s latest rate decision and Monetary Policy Report, which will be presented in a Press Conference by Governor Stephen Poloz. Manufacturing Sales data will then be released on Thursday, followed by the Consumer Price Index and Retail Sales on Friday.

UK News

  • Pound falls below $1.20 ahead of May’s Brexit speech – FT. The pound has fallen below the $1.20 mark for the first time since the October “flash crash”, ahead of a speech on Tuesday when UK prime minister Theresa May is expected to signal that Britain will fully break out of the EU’s common market after Brexit. The UK currency fell as much as 1.6 per cent to a low of $1.1986 against the dollar in early Asian trading in an unusually wide gap from Friday’s New York close at $1.2175. Separately on Monday, Tory MP Michael Gove told the BBC that Donald Trump’s offer of a speedy US-UK trade deal was “another card in Theresa May’s hand” as she prepares to enter Brexit negotiations.