Market Info

A very quiet start to the week. UK Spring Statement and US CPI are highlights on Tuesday. GBP opens steady at USD1.38 and EUR1.12

12/03/2018 | OzForex

Monday 12 March

Great British Pound

As of Friday morning in London, GBP/USD was exactly unchanged on the week around 1.38 though by 3pm it had rallied almost three quarters of a cent to USD1.3875. The sole reason for this came from across the Atlantic; the latest US labour market report showed that 312,000 jobs had been created in February but the pace of average earnings had slipped back from 2.9% to 2.6%. Stock markets loved this combination and as the DJIA surged more than 300 points, so the US Dollar slipped back against all the major currencies. Whilst the GBP finished the week higher against the USD, it was down against the Australian and Kiwi Dollars at 1.7650 and 1.9015 respectively.

In economic news this Monday morning, credit card company Visa says spending on cards fell again in February, dropping 1.1%, and that the first quarter of 2018 was on track to be the “worst on record”. It said spending by consumers had fallen in nine out the past 10 months. The detailed Visa figures show the amount spent on the physical high street fell 2.6% while households also cut back spending on recreation and culture by 6.1%. The firm noted, “Britons have been in belt-tightening mode since last summer. February’s cold snap certainly didn’t alleviate this situation, particularly when we shine a spotlight on high street spending, and recreation and culture in particular, which saw its biggest decline since April 2010. As we look ahead into March, consumer spending is at risk of posting one of the worst Q1 results on record.”

Investors’ thoughts now turn to Tuesday’s Spring Statement from the Chancellor of the Exchequer (the traditional Budget has now been moved to Autumn). There is the chance of a rare upgrade to UK economic forecasts after the incoming data over the past few months have shown the Office for Budget Responsibility was too pessimistic in its assumptions on UK productivity. Speaking on TV on Sunday, the Chancellor said Britain''s debt mountain was still too high and had to be brought down. "There is light at the end of the tunnel because what we are about to see is debt starting to fall after it has been growing for 17 continuous years. That is a very important moment for us but we are still in the tunnel at the moment… We have a debt of £1.8 trillion - 86.5% of our GDP. All the international organisations recognise that is higher than the safe level." The pound opens in Europe around USD1.3860, GBP/AUD1.7605 and GBP/NZD1.8950.

US Dollar (USD)

GBP/USD expected range: 1.3725 – 1.3915

The US Dollar fell, rallied, then fell again last week and on a trade-weighted basis finished pretty much where it had begun. Its index against a basket of major currencies opened in Sydney last Monday around 89.60. It hit a low on Wednesday morning in London at 89.05 but immediately prior to the latest US employment report had rallied to a best level just above 89.90. The combination of a 312,000 increase in non-farm payrolls but a softening in average earnings to 2.6% from the 2.9% which had spooked equity markets a month ago, was deemed to be ‘risk-positive’ and pushed up equity markets whilst weighing down on the US currency.

The softening of President Trump’s initially very hard line on tariffs was seen as a modest positive for the currency, not least because it might reduce the threat of retaliatory action from other countries. An offer of talks from North Korean leader Kim Jong-Un was also interpreted in some quarters as a diplomatic victory for Mr. Trump which also helped boost the US Dollar and by Friday lunchtime the USD index stood at an 8-day high of 89.90. The February labour market report, as noted above, helped allay some of the recent concerns about a sharp increase in wage pressures and inflation as the US economy approaches full employment. The DJIA once again advanced more than 300 points on Friday.

For the week ahead, the main focus on economic data will be Tuesday’s CPI data. The headline inflation rate is expected to tick up to 2.2% y/y from 2.1% although the core rate excluding food & energy costs is expected to remain unchanged at 1.8%. Bear in mind that unlike the RBA, RBNZ or BoE, the Federal Reserve doesn’t have a CPI target. Instead, it looks at the core PCE deflator which is still some way below its preferred 2.0% level. After the inflation numbers, on Wednesday we have retail sales and then towards the end of the week it’s housing and industrial production data. The US Dollar index opens in Europe this morning around 89.60.