Good morning,
Dutch elections more dangerous than French
Yesterday’s session was as quiet a day as we have had in 2017 with a lack of data and some market participants away for half term, pairs and crosses stayed well-behaved. EURUSD was the one major pair that took a leg lower as pressure on the single currency from political issues only increased. The focus is once again on the movements in the French polls that continue to show a commanding lead for Marine Le Pen in the first round of voting. Although, she is still forecast to lose the 2nd round to either Independent candidate Emmanuel Macron or Republican Candidate Francois Fillon.
Markets are going to lose their minds when they realise that there is an election in the Netherlands in a little over four weeks, and as we have said on a few occasions we believe that the Dutch elections on March 15th hold a lot more risk for the Eurozone in the short term than the French elections and we will be covering off exactly why in our webinar on the subject a week on Wednesday.
If you are using the euro in anyway then this webinar may be able to help you navigate the upcoming political volatility. You can register here.
No pressure drop
The economic calendar picks up today with the latest inflation numbers from post-Brexit vote UK. We expect them to rise to the 2% target the Bank of England has set for inflation, and therefore for the highest reading since December 2013. Last month’s pick up in input prices of 16.9% cannot disappear without a trace and shows that the weak pound as well as increases in commodity prices are starting to knock on the door of gains in consumer prices.
Our data here shows that as much as 75% of the hedges put in place for the referendum to protect against falls in the pound had expired by the end of 2016; retailers and wholesalers who were once insulated from the fall in the pound have now got to pass these price rises on to their customers and recent data suggests that is beginning.
While garnering headlines the moves by some utilities companies to increase their gas and electric rates will not have an effect yet but will do soon.
Real wage declines to stay the BOE
The other side of the inflation coin is of course the wage picture and while we expect wage gains to remain above 2%, a rise to 3-3.5% to offset the pick-up in inflation is unlikely and real wage declines will chip away at the confidence upon which a lot of this consumer driven expansion has been based.
The number is due at 09.30 and we foresee a pop in sterling as a result as traders, incorrectly, increase their bets that the Bank of England will be forced into a rate hike by the end of the year.
Out like Flynn
Elsewhere the USD has weakened slightly overnight against the yen and euro following the resignation of Donald Trump’s National Security Adviser Lieutenant General Michael Flynn.
Fed Chair Janet Yellen also speaks at 3pm GMT this afternoon and is expected to keep thoughts of a March rate hike live.
Have a great day.