Good morning,

GBP: Sterling lower as Brexit reality punctures rate thoughts

Friday undid all of the positivity seen in sterling crosses by Thursday’s Bank of England meeting. Every single bit of optimism afforded to the pound on the back of Governor Carney’s comments on interest rate increases and upgraded growth and wage forecasts was lost following comments from the EU’s Chief Brexit Negotiator Michel Barnier that the transitional period is ‘not a given’.

For sterling, nothing is more important in the short term than a transitional deal that extends the UK’s membership of the Single Market and Customs Union. The CBI has been vocal on the need for clarity for its members and we know that countless of you reading this feel the same way.

So far, the broad swings in equity and volatility markets that have made headlines this week have not been felt in currency markets but if they do there are a fair many more currencies that would be seen as a ‘safer’ bet than sterling given the political atmosphere.

Following on from Thursday’s Bank of England meeting Chief Economist Andy Haldane told the Evening Chronicle – a paper in the North East of England – that “some further tightening of policy might be needed over the period ahead,” however the central bank is in “no rush” to do so. He went on to say that “right now, inflation is running above its target and that’s one of the reasons we raised interest rates last year”.

Haldane’s colleagues Vlieghe and McCafferty both make public comments later today.

The latest UK inflation numbers are due tomorrow morning and should show that inflation has slipped back again towards target; consensus expectations are that CPI will hit 2.9% in January, the lowest since August and closer to where the wage picture sits.

USD: Wednesday’s child could be full of woe

It is inflation numbers that will dominate the US dollar this week as well with Wednesday’s CPI report also having wider repercussions. The yields on US debt have risen in the past week, pushed by that jobs report 10 days ago and the stronger wage numbers. The last week has not been a fun one for equity markets and as long as these yields remain high then equities will likely remain under pressure with, we think, the dollar strengthening. A strong inflation report on Wednesday will prolong these moves either way.

The market wobbles are unlikely to shift the Fed from a rate hike in March but a continuation of market pains will have some policymakers nervous that higher rates are not warranted yet.

The Day Ahead

The economic calendar is stunningly quiet, the UK’s parliament is on recess for the next 8 days, Japan is on a bank holiday and the US budget drama has been pushed into March. Equity markets are rising following a bounce back on Friday afternoon but the world is set fair for a quiet session today.

Have a great day

Jeremy Cook, Chief Economist