Morning Report: 18 January 2017

18th January 2017 By: Ranko Berich

GBP It’s an old adage, but “sell the rumour, buy the fact” was a perfect description of yesterday’s price action on sterling, which strengthened on the day against USD and EUR. Having already sold sterling after the weekend’s press reports on the contents of today’s speech, the market seemed happy buying the pound on the news that Parliament will get a final vote on the Brexit package, some strong inflation data, and a lack of any further adverse political developments. The details of May’s speech were almost exactly as reported on by media, suggesting that perhaps the Prime Minister had undertaken a deliberate communications strategy to price in the ostensibly sterling negative elements of her speech beforehand. This morning’s labour market data has included a surprisingly strong increase in the Average Earnings Index, which rose 2.8% year on year in December, while the Unemployment Rate remained unchanged at 4.8%.

EUR The euro benefitted from broad dollar weakness yesterday after Donald Trump indicated that a strong dollar is negative for the country, although it has since retraced against most of the G10 basket of currencies after a worse than expected economic confidence index. Despite of missing expectations, the economic confidence index did hit 1-year highs in the Eurozone, maintaining the extremely positive momentum of the Eurozone’s data. Today’s data includes the final revision of the Consumer Price Index for December (10.00 GMT). If confirmed the 1.1% increase, it would be the highest reading in more than 3 years.

USD Yesterday’s dollar broad weakness pushed the greenback lower against all the G10 currencies for the first time since the US election. The driver for yesterday’s dollar weakness was the same as the dollar’s strength for the last two and a half months: Donald Trump. The President-elect spoke critically of USD strength in an interview with the Wall Street Journal, causing a broad USD sell off. Elsewhere Lael Brainard of the Federal Open Market Committee gave a speech in which she discussed the implications of fiscal policy in the US for monetary policy. She stated that the US economy is making good progress towards the 2% inflation target, but that fiscal policy remains the biggest source of uncertainty at the moment, suggesting that adequate fiscal measures could lead to faster increases in interest rates. Today at 13:30 GMT the latest Consumer Price Index data will be released and could offer some support for USD if the Index maintains its strong recent momentum. Later in the evening, Federal Reserve Chair Janet Yellen will speak at 20:00.

CAD It’s a big day for the Canadian dollar, which strengthened further amid yesterday’s broad USD weakness. The Bank of Canada will announce its latest rate decision at 15:00 GMT, which will be accompanied by a Monetary Policy Report. At 16:15, Bank of Canada governor Stephen Poloz will discuss the report, and the outlook for monetary policy, in a press conference. Rates are widely expected to remain on hold, and given the generally slow rate of improvement in Canadian macro data it’s unlikely there will be any major revisions to the monetary policy outlook, but the prospect of monetary policy normalisation at some stage in the future may come up for discussion.

UK News

  • May warns UK will walk away from ‘bad deal’ – FT. Unease in Brussels as push for free trade comes with veiled threat. Theresa May has set out a new role for a “global Britain” outside the EU’s single market in a landmark speech outlining plans to take the edges off a “hard Brexit” but vowing to fight back if she failed to get a good deal. The prime minister said she would seek a “bold and ambitious free-trade agreement” with the EU and hoped to maintain partial membership of the EU customs union, continued tariff-free trade and an “implementation phase” to avoid a Brexit cliff-edge. “We are leaving the European Union but we are not leaving Europe,” she said.
  • UK receives positive responses from Brussels on leaving plan – Reuters. Minister Theresa May set out her priorities for upcoming negotiations on leaving the European Union. “Some of the other responses we got back from Brussels overnight reflected that, that this was a positive response, something that they were, I think they were hoping for, frankly,” Davis told BBC radio on Wednesday. May said in a speech on Tuesday that Britain would seek the greatest possible access to European markets but aim to establish its own free trade deals with countries beyond Europe, and impose limits on immigration from the continent.