Morning Report: 22 March 2017

22nd March 2017 By: Ranko Berich

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GBP.  Sterling hit new fresh highs today against both EUR and USD supported by the highest inflation levels in almost 4 years, fuelling expectations for a hawkish response from the Bank of England. Headline inflation rose to 2.3% but, more importantly, core inflation, which excludes volatile series such as food and energy, rose to the Bank of England’s inflation target of 2%. The retail sales price index also rose to multi-year highs, completing an inflation release that is difficult to overlook. No data is expected to be released today.

EUR.  The euro had a good day yesterday, strengthening after opinion polls showed that Emmanuel Macron, front-runner in France’s presidential election, has further increased his lead. The threat of far-right candidate Marine Le Pen has dominated market sentiment over the April 23 elections, with the National Front leader’s ambition to take France out of the European Union weighing on the euro. However, after a good showing from Macron in France’s first ever American-style debate on Monday night, the euro continued to strengthen throughout the day, eventually reaching a three month high. With an absence of any fresh economic indicators released yesterday or due out today, we expect the single currency to remain at these relatively elevated levels in today’s trading.

USD.  The dollar has recovered somewhat this morning, after the DXY- the dollar index- recorded a 0.4% drop yesterday, breaking below critical support levels. US equity markets yesterday snapped a 109 day streak with no falls of more than 1%, with doubts about the implementation of Trump’s promised reforms in healthcare, one of its biggest campaign promises, sending the financial and small-cap sectors down sharply. If the repeal of the Obamacare does not move forward, the Trump administration would face significant impediments to carry out their promised tax cuts, something markets had aggressively priced in already. House price index and existing home sales data will be released at 13.00 GMT and 14.00 GMT respectively.

CAD.  The Canadian dollar posted a significant rally after wholesale sales on Monday and retail sales data yesterday showed consumer spending improving in Canada. However, Lawrence Schembri, Bank of Canada’s Deputy Governor, indicated that uncertainty remains elevated in the country and rested importance to the strong data observed this week. As a result the loonie dropped to a 4-day low. Today’s crude oil inventories data could have an effect on CAD via crude oil prices movements.

UK news

FT: Food and fuel push UK inflation to 3-year high. Consumer prices rise 2.3% while shops pay 3.7% more to manufacturers. Increases in the cost of food and fuel helped push UK inflation to its highest level since September 2013, raising concerns over a squeeze in living standards. The consumer price index for February shows prices have risen 2.3 per cent compared with a year ago, according to the latest data published by the Office for National Statistics on Tuesday. In January, the annual figure was 1.8 per cent and analysts had expected a 2.1 per cent increase. The Bank of England’s inflation target is 2 per cent. “Core” CPI, which excludes food and fuel, increased 2 per cent from 1.6 per cent the previous month.

Reuters: Optimism in UK factories surges to 22-year high as exports rebound: CBI survey. Optimism among British factories surged to a 22-year high in March as exports rebounded, a survey showed on Tuesday, adding to signs manufacturing has benefited from sterling’s fall after the Brexit vote. The Confederation of British Industry’s monthly balance of output expectations in the coming three months rose to +36 from +33 in February, its highest level since February 1995. The survey also showed export orders growing at the fastest pace since December 2013. However, the total order book balance held steady at +8 in March, which may suggest a slightly weaker influx of domestic orders given the large improvement in exports.