News this morning has broken that the UK and EU have agreed a transition deal for Brexit up until the end of 2020, although the deal needs to be signed off from Michel Barnier and David Davis. The Pound has reacted well, making advances against most of its G10 peers.
Sterling traders will be kept on their toes this week with an abundance of risks events to navigate. Inflation figures tomorrow and labour market data on Wednesday will take on added importance with the Bank of England’s MPC due to meet on Thursday – economists expect rates to be left on hold via a 9-0 vote.
There were reports on Friday that the Brexit Select Committee are to urge UK PM May to delay leaving the EU given how unprepared they are along with the Irish border issue still a stumbling block.
The Dollar Index finished Friday little changed for the week despite more upheaval in the Trump administration. Secretary of State Rex Tillerson was the latest casualty, replaced by Former FBI Director Pompeo while the White House was forced to deny reports that National Security Advisor McMaster was next to go. Focus this week turns to the Federal Reserve who are expected to raise the target range for the federal funds rate by 25 basis points although more interest will likely be on the rate projections, and whether officials are leaning towards three or four hikes across the course of 2018
Recent ECB rhetoric has taken a slight dovish turn, with comments from President Mario Draghi last Wednesday weighing on the single currency. Speaking in Frankfurt, he warned that the upward trend of inflation is still subject to some degree of uncertainty and downside risks have not disappeared. Inflation data releases on Friday supported his view as February CPI was revised down to +1.1% YoY from +1.2% in the flash reading. This week we look ahead to consumer confidence data on Tuesday and preliminary Markit PMI data on Thursday.
Support for Japanese PM Shinzo Abe has dropped to its lowest since his term began as the ongoing cronyism scandal rumbles on, casting doubt over his future and that of Finance Minister Aso. The associated political uncertainty underpinned the Japanese Yen last week while more changes in the Trump administration also boosted its safe-haven appeal. The Yen also begun this week with a modest bid tone, supported by the somewhat indecisive risk sentiment. The BoJ summary of opinions said that it is appropriate to pursue powerful monetary easing with persistence under the current guidelines. Looking ahead, Thursday’s CPI data will be the focus on the data front with the headline rate seen rising to +1.5% YoY from +1.4%.
There were no surprises from the SNB last week and as such, very little reaction in the Swiss Franc. The benchmark deposit rate was left on hold at -0.75% while officials repeated the view that the Swiss franc remains highly valued. Inflation forecasts were shifted slightly lower. This week looks set to be relatively quiet with trade figures due tomorrow representing the only notable data release.
The minutes from the Reserve Bank of Australia’s March policy meeting are out on Tuesday which could offer some more detail on the soft language used to describe the growth outlook. Rates were left on hold at the meeting but RBA Deputy Governor Debelle did warn on Friday that investors are under-pricing the risk of higher interest rates globally and need to seek adequate compensation for that risk. Labor market data due on Thursday is also worth watching for the Aussie Dollar with another 20.0K jobs expected to have been created in February.
The Canadian Dollar was the weakest of the G10 currencies last week, falling after dovish remarks from Bank of Canada Governor Poloz. He noted that there remains a degree of untapped supply potential in the economy which means they may be able to have more economic growth, a larger economy, and therefore more income per person, without generating higher inflation. Canadian CPI figures are due on Friday and the headline rate is expected to slow to +1.4% from +1.7%. It will also be interesting to hear from Deputy Governor Wilkins who speaks on Thursday to see if he offers a similarly dovish assessment.
NEW ZEALAND DOLLAR
Weaker-than-expected GDP weighed on the New Zealand Dollar last week – fourth quarter GDP came in at +0.6% Q/Q (f/c. +0.8%) and +2.9% YoY (f/c. +3.1%). The data will also be fresh in the mind of RBNZ policymakers who meet on Wednesday and are widely expected to leave the benchmark rate on hold at 1.75%. A poll released on Friday said that most economists do not expect any movement on rates until late-2019.
It could well prove a quiet week for the Swedish Krona with an absence of any notable macro releases or speakers. Data last week showed headline CPI in line at +1.6% YoY which helped to underpin a modest increase in the Krona although any upside is likely to be contained by the recent dovish rhetoric from the Riksbank.
The Norwegian Krone finished on Friday as one of the strongest G10 currencies for the week, boosted by Thursday’s hawkish Norges Bank announcement. The benchmark rate was left on hold at 0.50% as was widely expected but they said the “the outlook for the Norwegian economy suggests that it will soon be appropriate to raise the key policy rate”. Governor Olsen added that “the key policy rate will most likely be raised after summer 2018”. We expect a quieter week ahead for the Krone with any downside likely to be limited by the prospect of higher rates this summer. Data wise, unemployment figures are due on both Wednesday and Friday and both expected to show a minor decline.
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