Currency UK Economy updates

1. Currency Updates4-8 Jan 2016Currency UK Ltd

2. A brief look back at 2015 shows a few momentous events we are unlikely to see again in a hurry. Last January the Swiss removed their currency peg to the Euro, sending rates into a tailspin. In May, the UK surprised itself by voting in a majority government causing Sterling to surge across the board. In August the US blamed the Chinese for not raising interest rates, putting brown trousers back in vogue for the first time since 1979 and causing investors to flock to the Euro. And the US finally raised interest rates in December, normalising monetary policy after a ten year wait.New year, new stronger Dollar. The Greenback starts the year with fresh highs against its rivals suggesting a possible strong year. It is early to make any bold assumptions as trading volume over the Christmas period would have been reduced, which could have allowed the Dollar to rally. However, the outlook is strong for the US Dollar as the US economy is now in hiking mode and looking to kick on in 2016.EURUSD has a bearish outlook this month, following a bullish December. The pair is testing new lows of 1.08 as Dollar strength weighs on the pair. On the flip side, the Euro has continued to strengthen against Sterling since November - it is currently eyeing 1.34 levels.Major events to look out for this year are: sanctions on Iran finally being lifted and oil production to rise all year; a second US Rate Hike; potentially a UK Rate Hike, probably delayed due to a Brexit referendum; whether the Saudi’s maintain a currency peg with the US Dollar. Also to consider are anything Mario Draghi does as he tries to lift the Eurozone out of the mire, and the Chinese economy in general.And lastly a quote from J.K. Galbraith - “Economists don’t forecast because they know, they forecast because they’re asked”.

3. The main economic highlight today is Eurozone inflation data in the form of a CPI reading. The core year-on-year CPI figure is expected to tick up slightly from 0.2% to 0.4%. However, if yesterday's CPI data from Germany is anything to go by the result may be underwhelming. A weak price growth reading today could spark speculation that there may be further expansion of the quantitative easing programme, and reverse some of the strength we have seen from the Euro over December. It may likewise punish the Pound as further European Central Bank (ECB) easing stands to compound imported disinflation pressure in the UK, delaying the possibility of Bank of England rate hikes.Despite UK data coming in weaker than the market consensus yesterday, Sterling was able to claw back some of the losses versus the Euro. The appreciation of the Pound was, however, somewhat muted and came as a result of less than impressive inflation figures from Germany as opposed to a resurgence in the value of SterlingThis was detailed in the manufacturing report that we received yesterday which showed us that the UK manufacturing industry disappointed in December in comparison to November’s figures. Some predict that we may continue to see a downward trend in other economic sectors following the impact of the recent storms which swept the country.From a political standpoint, news filtering through tells us that sentiment from a UK business standpoint is shifting towards the negative. The number of finance chiefs who oppose a “Brexit” has decreased from 74% to 62%, whilst the number of chiefs completely in favour has shifted from 2% to 6%, mirroring consumer sentiment.US Data yesterday showed Production on the ISM index slipped from 48.6 in November to 48.2. Any number below 50 indicates factory activity is contracting and yesterday’s data showed the greatest decline for six years. Blame has been placed on oil prices and the oil industry’s lack of demand for metals. This coincided with data showing a decline in Chinese manufacturing that spooked global markets on Monday. A report from the Commerce Department showed that construction spending also slipped for the first time in a year and a half, falling 0.4% in November - the biggest drop since June 2014. • https://www.currencyuk.co.uk/about-cuk/what-we-do

4. As the US has been the first major economy to hike rates, the Federal Open Market Committee’s (FOMC) December minutes will be carefully watched this evening, with the markets expecting some form of indication of the path of rate rises for 2016. Janet Yellen and co. have previously hinted that there could be four increases to the baseline rate for the year.The Dollar continues to print fresh highs against both Euro and Sterling. The continued volatility in China has also led to investors fleeing to the Dollar’s safety. Trade balance, ISM non-manufacturing PMI and Markit PMI for the US are also out this afternoon, so expect more Dollar movement.The Pound has continued to lose ground against the Dollar as the markets’ fear of a 'Brexit' intensified after David Cameron said he'll allow ministers to campaign for the EU exit. As the Brexit issue raises a fairly big question about Britain’s EU future, and it’s unlikely to be resolved soon, this will be a “millstone around the neck” for Sterling. UK Services PMI which will be issued this morning could further extend the Pounds losses with a bearish reading.Inflation in the Eurozone remained at 0.2% in December, unchanged from November and less than the forecasted 0.3%.The tensions escalating in the Middle East have increased uncertainty, but the effect on oil prices is not clear cut. The strain between Saudi Arabia and Iran will likely keep OPEC’s ability to coordinate a cut to production in check. • https://www.currencyuk.co.uk/about-cuk/what-we-do

5. Last night's Federal Open Market Committee minutes indicated that the Fed do intend to hike rates by 25 bps four times in 2016. It had stressed however that economic conditions that will justify the hikes had to be gradual and data dependent. The minutes also confirmed that they do see inflation rising to its 2% target. "Participants emphasized the need to adjust the policy path as economic conditions evolved and to avoid appearing to commit to any specific pace of adjustments," according to the details published last night. The minutes also drew attention to other downside risks to inflation such as shock from oil prices and continuous rise in the value of the US Dollar. It is also feared that the strengthening in the labour market will not be sufficient to offset the impact of the persistent global disinflationary forces.China again was the centre of attention last night as the People’s Bank of China (PBoC) devalued the Yuan yet again; the currency is now at its lowest point since 2011. We have also seen Chinese Stock Exchanges shut within 15 minutes of opening after prices dropped by 5% under the new “Circuit Breaker” rules. Such actions will no doubt affect the Fed’s decisions and forecasts going forward. As with last August, such events like that in China can influence how the Fed will act. The US hike was held off due to the Chinese stock market crash and the global uncertainty it caused. The course of hiking rates may be slightly slower than has been forecast by the Fed, until issues in China can be alleviated, if at all.The events in China are likely to dictate market sentiment this morning too; safe haven flows are evident in Gold, Yen, Euro and Swiss Franc. Consequently the Euro has broken back into 1.35 range against the Pound. Eurozone unemployment is expected to remain at 10.7% having declined steadily from its peak over the last couple of years. Retail sales in the Eurozone are expected to have increased by 0.2% in November, up 2% on the same month a year earlier, possibly promoting a rebound in EURUSD.George Osborne is due to speak in Cardiff today and the tone is likely to be starkly different from the upbeat Autumn Statement. It is expected that he will warn of global risks to the UK economy such as a steep drop in share and commodity prices, the oil market woes, rising tensions in the Middle East, recessions in Brazil and Russia and North Korea’s nuclear claims. All this doom & gloom is unlikely to aid Sterling’s cause when we’ve already opened at 1.3532 vs EUR and 1.4589 vs USD. • https://www.currencyuk.co.uk/about-cuk/what-we-do

6. Sterling had a difficult day yesterday as the Brexit headlines took their toll. Against the US Dollar, the Pound hit a five-and-a-half year low of 1.4536 before recovering overnight to open at 1.4612 this morning. Market expectations of a UK Rate Hike have now slipped to March 2017.European Retail Sales came in below forecasted levels but the unemployment figure was lower than expected at 10.5%, marking a third consecutive drop. Economic Sentiment Indicator results for December also came in at a four year high of 106.8, showing that those within the Eurozone think that the gloom is lifting. On Wednesday, Services PMIs out of Germany and the Eurozone beat expectations, with both indicators pointing to expansion in the services sector. These solid releases give the European Central Bank some breathing room with regard to further easing steps.Price action in the EUR/USD continues to be dominated by the risk-off/on sentiment in the European markets, with the macro releases having virtually no impact on the currency pair. This morning, Germany’s industrial output decreased by 0.3% in November, after reporting a 0.5% growth seen in October. However, the country’s trade surplus shrank in November to €20.6 billion versus €22.3 billion previous.Meanwhile over in the States we are due the first Non-Farm Payroll (NFP) of 2016. The forecast is another strong reading with markets expecting 200K+ jobs being added to the US labour market, while the unemployment rate is expected to remain unchanged at 5%. Even more notable, the year-on-year growth rate in average hourly earnings will most likely rise to 2.7%, the highest in almost six years. Despite the relatively dovish nature of the December Federal Open Market Committee (FOMC) minutes, the improvement in wage growth and strong NFP figure could prompt the FOMC to a more hawkish outlook at the January 27th interest rate decision. This all leads leading to more Dollar strength across the board. • https://www.currencyuk.co.uk/about-cuk/what-we-do

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