As first quarters go it’s been a solid start to the year for 2017, all the more surprising given the fact that we’ve seen two US rate rises in the space of three months, and put aside concerns about the first few months of a Trump presidency and the European banking system, against a backdrop of simmering political risk in Europe.
Economic data by and large has been pretty good across the board from the US, UK, Europe and Asia, while rising inflation has prompted some optimism that we could see some trickledown effects into higher wages.
Yesterday’s upward revision to US Q4 GDP, along with more hawkish commentary from another Fed voting member, Robert Kaplan of the Dallas Fed saw the US dollar gain, while rising yields propelled financials higher and US markets into another positive close, in the process helping to erode further the falls seen last week.
Given this week’s hawkish commentary today’s release of the latest Fed PCE numbers need to be in line with expectations of 1.7%, though given recent declines in oil prices a downside surprise could take some wind out of the sails of this week’s US dollar rebound, and it is this slowdown in inflation that could well take the edge of rate hike expectations. We’re starting to see it in Europe and we could start to see it in the US as well.
As we come to the end of the week, month and the quarter the pound has managed to hold up well in spite of the triggering of article 50 and a rather belligerent tone from a number of EU leaders with respect to UK Prime Minister Theresa May’s notification letter.
For some reason they seem upset at the fact that the UK government has put the issue of security on the table for discussion in the Brexit talks. This self-righteousness does become somewhat undermined when the EU puts arbitrary price tags on when talks about a trade deal can start. Who is blackmailing who exactly?
It’s not exactly an auspicious start, with the European Union expected to set out a rough framework of a response to Wednesday’s UK letter sometime later today.
In spite of this the pound has held up fairly well, gaining strongly against the euro, while also having a good day against the US dollar. On the data front we will get to see the final iteration of Q4 GDP which is expected to come in at 0.7%.
The recent weakness in the euro has been exacerbated by some unexpected sharp falls in German CPI this week, as well as some tempering of expectations about future ECB policy over the rest of the year.
With the ECB expected to start tapering its asset purchase program from €80bn a month to €60bn next month there had been a belief that we could see that come down further later this year. This seems much less likely now and could well get reinforced if today’s EU flash CPI for March sees a similar sharp drop as this week’s German CPI numbers.
Last month we saw CPI hit the ECB’s 2% target for the first time in four years, however this is expected to slip back to 1.8%, while core prices could also slip back from their current 0.9% to 0.8%. Anything weaker than this is likely to pressure the euro further in the short term.
EURUSD – the 50 day MA at 1.0680 is currently acting as support, with a break potentially targeting a move back to 1.0600 initially. We need to get back above the 1.0780 level to stabilise.
GBPUSD – the failure to get below the 1.2380 area saw the pound rebound and push back above the 1.2500 area yesterday. While above the 1.2350 area the risk remains of a move back towards the highs this week and potentially higher towards 1.2800.
EURGBP – yesterday’s fall below the 0.8620 area has seen the euro fall back towards the 0.8550 area as suspected, with the potential to fall further towards the previous lows at 0.8400. While above 0.8550 we could well see a move back to the 0.8620 area.
USDJPY – yesterday’s move back through 111.60 could well see further gains towards the 112.50 area in the short term. Once above 112.50 the risk of a move back towards the 110.00, as well as the 108.50 area diminishes.
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