The main events for the week ahead…

  • Monday: Brexit negotiators deliver press conference
  • Tuesday: UK CPI
  • Wednesday: UK Wage Data, US Oil Inventories, FOMC Announcement, Projections & Press Conference
  • Thursday: EU Manufacturing & Service PMI’s, UK Retail Sales & BoE Rate Announcement & Minutes, Day 1 of EU Summit on Article 50
  • Friday: US Durable Goods, Day 2 of EU Summit on Article 50

An important week for both sides of the pond as UK economic data, in combination with the EU summit on Brexit, are set to provide the framework for the next near-term trend in GBP. Meanwhile, on Wednesday night Jerome Powell is expected to deliver his first interest rate hike as Fed Chair with focus on the accompanying projections and to any meaningful change in the dot-plot matrix for US interest rates at the end of 2018.

Will the UK secure a transitional deal…

The objective of the UK this week is to secure an agreement for a transitional period with its European partners. Recent news coverage would suggest the goal posts have moved closer to one another but there remains the issue of the Irish border that could still disrupt the deal. The Business Insider wrote this weekend that leaving the EU’s customs union means a hard border will be very difficult to avoid, and experts speaking to the news agency cast doubt on the idea that a workable solution currently exists.

Fast forward to today, and there is a press conference being delivered by EU lead negotiator Michel Barnier and UK Brexit minister David Davis at 1145GMT, which should give us the current status in talks. Given the closed-door meetings taking place over the coming days I would remain extra vigilant throughout the week for rumours and leaks which could create much more short-term bouts of volatility than normal.

Health of the UK economy also in focus this week…

Aside from the Brexit negotiations there are some important economic data points coming out of the UK this week, culminating in the Bank of England interest rate announcement on Thursday. Before then, Tuesday will see the release of UK CPI data where the consensus is for a drop from the 3.0% region down to levels not seen since around April 2017 (2.7% Y/Y), however, close attention will need to be paid to the core reading. Meanwhile, average earnings due the following day is expected to see a move to 2.7% from 2.5%, a level which has not consistently been achieved since 2015. If both these data points come in as expected it would certainly ease some of the pressure on the tightening of household income and play into the markets expectations that a May rate hike from the Bank looks probable (currently priced at ~70%). In addition to this we also have UK Retail Sales report on Thursday morning which is expected to be slightly weaker this time around but analysts at ING note market participants may look through this given largely weather-related disruptions.

Cable

Any surprises from the Bank of England?…

I would think not. The economic data discussed above, all front runs the Bank of England’s rate announcement and minutes and as such will likely form the bulk of the MPC’s discussion. However, the outcome of the EU Summit due to conclude on Friday will not be known when the central bankers meet on Threadneedle Street. Because of this timing the political uncertainty will likely tone down the hawkishness of the accompanying minutes. Here’s ING’s outlook for GBP/USD and EUR/GBP dependent on different outcomes. More on details can be found HERE.

ING GBP forecasts

Fed’s Powell set to deliver his first interest rate hike…

Federal Funds Rate (FFR) futures on the CME are pricing in a 94.4% probability of a 25bps rate hike from the FOMC on Wednesday night. As such, the hike in itself is of little consequence for markets and attention will be firmly on the outcome of any alternations to the summary of economic projections, namely the dot-plot matrix.

Dot plots

While banks such as Goldman Sachs continue to expect a move to four rate hikes from the current communication of three, I see this hard to achieve as soon as this week. Recent economic data in the form of wages and CPI have shown signs that inflationary conditions are increasing but not at the break neck speed markets assumed at the beginning of February which prompted the US stock market to have its minor episode.

The combination these economic factors with the renewed trade tensions sparked by President Trump make it even more difficult for the US central bank to take an increasingly more hawkish tone than the one that exists at present. So, for now I would be expecting more of the same where an interest rate hike is delivered with a mildly hawkish tone but not enough to alter the rate hike projection for 2018. As for Powell’s inaugural press conference the chance of a slip up is minimal and I would expect him to deliver the event and the central banks stance with aplomb.

S&P

Other technical levels of significance for oil and EUR/USD this week picked out by our senior analyst Sam North…

Oil

EUR

 

 

Anthony Cheung
Anthony is a leading market commentator with over a decade of experience accumulated as Head of Market Analysis at a leading news and analysis organisation, and now a Director of Amplify Trading.