16 Jan 2018

Market Brief: All eyes on UK CPI

James Dazeley

Dealing Team

The USD continued to be sold for a sixth consecutive week yesterday as traders assessed the possibility for a hawkish policy shift at the European Central Bank.

Today's data release
  Key levels
09.30 UK CPI   Support Resistance
09.30 UK PPI GBP/ USD 1.3597 1.4013
11.00 ECB's Rimsevics speaks GBP/ EUR 1.1201 1.1508
13.30 US Empire Manufacturing      
Market overview

The USD continued to be sold for a sixth consecutive week yesterday as traders assessed the possibility for a hawkish policy shift at the European Central Bank. Coupled with the improving political outlook in the euro area and the pickup in global economic expansion, the Bloomberg Dollar Spot Index to decline 0.6% - its lowest level in three years.

The chance of a US government shutdown after Friday (19th) also appears to be weighing in on the dollar, as Republican leaders yesterday concluded that they would not be able to reach a long-term spending agreement. They are now working on another short-term funding proposal instead, although whether that will pass in time for Friday remains to be seen. Democratic leaders are reportedly saying they are unlikely to support any deal if it does not protect young illegal immigrants (the so-call DACA or Deferred Action for Childhood Arrivals). The last US government shutdown was in October 2013, when Republicans opposed to President Obama’s healthcare overhaul demanded its funding be canned. In a desperate bid to secure sufficient Democratic support to see a bill pass, one option Republicans are now considering is attaching a long-term renewal of the Children’s Health Insurance Program to the stopgap spending bill. Their logic is that many Democrats - especially senators seeking re-election this year - would struggle to vote against a bill that included this cash. Talks in Washington will resume today to try and find a solution.

Elsewhere, ECB member Hansson commented that the central bank should adjust its policy guidance before the summer and shouldn’t have any problems ending its quantitative easing programme after September. Speaking in an interview with German newspaper Boersen-Zeitung Hanson, he said “there are certainly good reasons to reduce the importance of the net purchases in our communication soon… also with a view to a potential end to these purchases”. He went on to say that if economic growth and inflation continue to meet the ECB’s projections, it would “certainly be conceivable and also appropriate to end the purchases after September”. Hansson’s comments come after minutes for the ECB’s December meeting showed policy makers were open to tweaking their policy guidance soon to align it with a strengthening economy. The euro extended gains against the USD after the comments, reaching a high of $1.2293, a level not seen since December 2014.

Sticking with central banks, in a speech last night, Bank of England MPC member Sylvana Tenreyro, said that the committee probably has ‘ample time’ before it seriously has to think about the next rise in the Bank rate. She remarked that a couple more increases would probably be required over the next three years, a view which echoes with the majority of her colleagues on the committee.

The day ahead

UK consumer price inflation is released at 9.30am and is expected to ease slightly to 3.0% in Dec y/y. While core figures, which exclude volatile food and fuel prices, are expected to decelerate to 2.6% in the reported month. On monthly basis, the pace of headline CPI inflation is expected to pick up to 0.4% from the 0.3% seen in the month of November. 

Thought of the day

The US markets return today after their national holiday yesterday. Martin Luther King day is celebrated on the third Monday in January each year, to honour his legacy in battling for civil rights. The fight to create a national holiday was a massive struggle, one that required similar commitment as the movement to guarantee the rights of all Americans: community organising, long-term determination and relentless persistence. The lack of liquidity in the market yesterday helped the Dollar hit its lowest level (on a trade-weighted basis) against a basket of currencies for 3 years! To discuss ways to hedge against the Dollar’s fall, please contact your Investec Dealing team on 0800 055 6339. 

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