It will be the first ‘Super Thursday’ of the year and markets will be closely watching whether any Monetary Policy Committee members vote for a hike. Any shift will alter the markets expectation that we don’t see a rate hike until July. We expect a rate hike later this year but there is a risk that they could move sooner. The inflation report provides further insight into the Bank’s thoughts and projections, including the supply side of the UK Economy. With sterling having gained over 3% since the November report, this should reduce inflation expectations. This morning we have seen the government set out that the UK will not remain part of the EU Customs Union once the UK leaves the EU.
Theresa May meets with Michel Barnier later this week to discuss the transition and implementation framework. As with previous negotiating points, this may take longer than scheduled. Beyond the Bank of England decision on Thursday, the industrial and manufacturing production numbers round out the week.
GBPEUR – 1.1321
GBPUSD – 1.4086
With negotiations started again around Brexit and ECB president Draghi speaking to the EU parliament this afternoon. Political events in Europe this week will be closely watched. Growth in the euro area continues along a positive trajectory, with GDP expanding by 0.6% in the fourth quarter of 2017 and 2.7% over the year. Meanwhile, Euro area inflation for January CPI dipped from 1.4% to 1.3%, though the ‘core’ rate rose from 0.9% to 1.0%. This will continue to leave the ECB with a balancing act on monetary policy.
This week is relatively quiet from a new data perspective, with European retail sales today, and German factory orders and construction PMI tomorrow. German industrial production and the ECB economic bulletin are as exciting as the rest of the week gets. The main interest is likely to be discussions around Brexit and seeing whether Angela Merkel can finally form a government.
EURUSD – 1.2442
EURGBP – 0.8833
Stronger-than-expected US wage data on Friday pushed 10 year US Treasury yields to a new four-year high above 2.8%. After Friday’s numbers, the Federal Reserve looks almost certain to raise interest rates when it meets again on March 21. The 10 year US Treasury yield is very close to breaking key long-term level at 3%, with the markets getting nervous about the impact of increasing rates, and their impact on equities and the economy. Elsewhere, the temporary extension of the US budget expires on Thursday, with both parties still some way apart, so another temporary extension looks the most likely outcome. In addition, we could see a breach of the US debt ceiling and a perfect storm of market risk if the two issues become entwined.
This week we see a raft of PMI data and Balance of Trade figures which are released tomorrow. The markets will likely be more concerned with the political situation, bond markets and potential knock-on effects within the wider market.
GBPUSD – 1.4086
EURUSD – 1.2442
