Market Info

UK CPI to breach BoE target. Wages key for GBP.

13/11/2017 | OzForex

Monday 13 November



British Pound (GBP)

The GBP begins this week on the same roller-coaster that it rode for much of last one. GBP/USD began last Monday at 1.3076 and having been as high as 1.3220 after Friday’s economic data, ended the week at 1.3190. Against the Aussie Dollar, GBP rose from 1.7087 to 1.7220 whilst against the Kiwi Dollar it gained exactly one cent from 1.8927 to 1.9027. Overnight, GBP/USD opened in Sydney at 1.3180 and has already fallen 60 pips to a low of 1.3120. The weekend Press in the UK was again dominated by politics; a constant stream of bad news for Prime Minister Theresa May’s minority government which remains in office (though arguably not in power) only because of a coalition agreement with the Ulster Unionists. The arcane rules of a leadership challenge in the Conservative Party require 48 of their MP’s to sign a letter of no-confidence. Reports on Sunday suggested there were now 40 such signatories and the number could rise as the EU withdrawal bill returns to the House of Commons on Tuesday. It is widely expected the Labour Opposition will join Conservative rebels to inflict a series of potentially damaging defeats on the government. As we saw last week, however, bad political news was to some extent offset by incoming economic data. This week brings UK inflation and unemployment data. CPI on Tuesday is likely to rise above the Bank of England’s 1-3% target range and BoE Governor Carney will have to write a letter to the Chancellor explaining what he will do to bring it down. Spoiler alert: he has already raised UK interest rates! With real earnings still falling, the British Pound is unlikely to rally much until wages show signs of picking up.



US Dollar (USD)

USD/GBP expected range: 1.3050 – 1.3160

The US Dollar performed very poorly last week. In the first 3 ½ days of the week, the USD index against a basket of currencies was essentially stuck in a range from 96.40-96.84. By Thursday afternoon in New York, however, the mood turned more negative, the S+P 500 index had its worst session in 3 months and the USD index then slid all day Friday to end the week at 94.10; its lowest close since October 26th. The chief reason for the US Dollar’s drop was nervousness about the likely success – or otherwise – of President Trump’s tax reform bill. This formed a central plank of his campaign pledge to “Make America Great Again” but was delayed so much that the hopes of USD bulls were consistently dashed through the first 10 months of his term of office. From November 9th 2016 to the beginning of January, the USD Index surged from 96.6 to 103.3 on hopes for a substantial fiscal boost, faster economic growth and much tighter monetary policy. By late September, the USD Index had tumbled to just 90.9 and if tax reform runs into the ground now, this will again become the downside target. Some support ahead of that comes from the 200 day moving average at 93.25, whilst investors will be eyeing closely any comments that President Trump makes in the Philippines at a meeting of the Association of Southeast Asian Nations (ASEAN).



European Euro (EUR)

GBP/EUR expected range: 1.1195 – 1.1320

From a low point last Tuesday of 1.1561, the EUR climbed slowly but steadily to a high of USD1.1666 before ending week at 1.1662. Against the British Pound, the volatility of the cable rate set the tone for GBP/EUR which swung between 1.1250 and 1.1367 to end on Friday in New York around 1.1306. This morning the softness of GBP/USD is again weighing on the GBP/EUR cross which opens in London around 1.1265. For the week ahead, Eurozone CPI on Thursday will likely be the most important of the economic numbers to be released. With Continental Europe now enjoying its 17th consecutive quarter of GDP growth, subdued price prices are the only reason the ECB continues its policy of Quantitative Easing; albeit now at a somewhat slower monthly pace. Provisional estimates for October showed prices rose just 0.1% on the month for a 1.4% annual inflation rate though with oil prices rising and already feeding into higher pump prices for petrol and diesel, it may not be long before CPI resumes its upward path. As we keep saying, these are the key driver (pun very much intended!) of inflation right across the G20 and the Emerging Markets universe, though the EUR exchange rate this week is more likely to be driven by sentiment towards the US Dollar. The overnight range in Sydney has been 1.1647-1.1662 and we’d look for a 1.16 big figure throughout the London morning session.



Australian Dollar (AUD)

GBP/AUD expected range: 1.7060 – 1.7230

The Aussie Dollar ended last week pretty much where it began against a USD which lost quite a bit of ground late Thursday and into Friday. The AUD/USD pair opened last Monday in Sydney at 0.7650 and in one of the quietest weeks in recent memory remained stuck in a range of less than 60 pips from 0.7636 to 0.7694 before ending at USD0.7659. The GBP/AUD cross rate – like all the sterling crosses – was driven almost entirely by movements in cable and the pair moved to a high of 1.7256 on Friday. This morning it opens more than a cent lower at GBP/AUD1.7125. For the AUD, a new monthly round of incoming economic data now begins for the RBA to then consider at their last meeting of the year on Tuesday December 5th. This kicks off with the NAB Business Survey tomorrow, then Wednesday it’s the quarterly wage price index and Thursday it’s the employment and unemployment numbers. Like most Central Banks around the world, the RBA has been a bit puzzled as to why falling joblessness hasn’t so far boosted earnings growth. And, like all the others, it just says “give it time, it will happen”. Interest rates in Australia aren’t going to move much, if at all, until wages actually do pick up. Indeed, RBA Assistant Governor Guy Debelle made exactly this point in a speech on business investment today: ““Are we just going to jack up rates to see how the household sector lives with that? I don’t think so,” he said.