Good morning,

GBP – The Price of Everything

We get the latest inflation numbers this morning which will tell us whether the latest increase in interest rates has had an impact on prices in the same way as it already has on consumer confidence. Ideally, the BoE would like to see inflation come back to 2%, however a recently strengthened pound may have had the desired impact that the Bank of England is looking for. As the EU summit approaches this week, we’ve had further comments from Liam Fox, International Trade Secretary, that the UK will be expecting a ‘virtually identical’ trade agreement upon leaving the EU. At this stage that seems hard to believe, however, we may see further back and forth over the week between the UK and EU on trade ahead of the summit.

EUR – ZEW you know what’s going on?

Beginning the day we have economic sentiment readings from Germany and the EU giving us an indication of institutional investor sentiment. These numbers will gauge investor optimism and pessimism so a strong number may give the EUR a boost. We then have European Central Bank President Draghi speaking this afternoon ahead of the EC B meeting this week. Investors will be closely monitoring his tone around policy change to see if the ECB will end the year more hawkish than currently priced and give us indication that real rates may likely rise soon.

USD – A building of momentum

There is very little in the way of economic data for the dollar today. Momentum for the greenback is slowly building and this is reflected in EURUSD and GBPUSD as they lean to the downside. The drivers are numerous but the number of jobs being added to the US economy has been predictably good across all 12 releases in 2017. Wage growth, along with many other G10 currencies, however has struggled to keep up – average hourly earnings down 2.5% from 2.7% expected.

If you couple this with stubborn inflation (currently 2.04%) which started off the year at 2.5% for January, 2.74% February and 2.38% March, is there really a case for aggressive future rake hikes? The last rate hike in June was a great example of ‘buy the rumour, sell the news’ with the Federal Reserve accidentally showing its poker hand to the table well in advance. With that in mind, Wednesday’s rate hike could be another red herring.

The Day Ahead

Oil prices are above $65 a barrel this morning following a report that a crack needs to be repaired in a pipeline in the North Sea. Inventories are high and the damage to the pipeline is described as a ‘hairline’ so this is not a Deepwater Horizon type blowout and nor should it prompt a longer term drive higher in prices but, in light of recent moves in inflation, a higher oil price will become increasingly important in 2018.

Have a great day

Jeremy Cook, Chief Economist