News and Events:
UK inflation accelerate faster than BoE expected
UK inflation accelerated substantially in February as the headline gauge rose 2.3%y/y versus 2.1% expected. More importantly, the core gauge, which excludes the most volatile components, climbed to 2%y/y (1.7% median forecast), adding pressure on the BoE. The pound sterling jumped sharply after the release as investors speculated about potential tightening measures from the central bank. GBP/USD was up 0.75% to 1.2450 this morning, while the pound rose 0.20% against the single currency with EUR/GBP hitting 0.8660.
Despite the fact that inflation accelerated faster than projected by the BoE at its February MPC meeting, we remain doubtful that the institution would take the risk to tighten its monetary policy at such an inappropriate time. Indeed, the government is about to trigger Article 50 and no one knows what is on the other side. In such a situation, the BoE cannot afford to reduce its support to the economy and will just have to sit tight and wait for inflation to decelerate. The committee projected that growth would slow over 2017 as households adjust their spending to lower real income growth, mostly due to the sharp depreciation of the sterling over the last few years.
In the short term, we are not ruling out further GBP strength with GBP/USD testing the 1.26 threshold.
Swiss watch exports fall…again
There is little respite for the Swiss watch industry despite broader improvements in global demand. Data released today showed that annual Swiss watch exports fell -10% to $1.50bn in February, further extending the sector’s rapid decline witnessed since 2010. The negative data zapped growing optimism generated by year-end bounce and communication from leading watch exporters reporting solid demand. Swiss watch exports fell -26 to USA, -12 to Hong Kong, and 23 to UAE. However, China posted a 6.7% gain, a positive sign for the industry and China’s domestic economic stability driver. Cleary the overvalued, uncompetitive Swiss CHF is having a significant effect on demand. However, changes in consumer behaviour must also be factored in. EURCHF remains the barometer for European political risk. With the result of the first French presidential debate and snap opinion polls suggesting a Macron victory, EURCHF rallied on fading political risk.
First French debate reveals clear two-horse race
The first of the French election televised debates kicked off last night with the six leading candidates taking to the podium on core election issues such as immigration, national security and economy.
Though relatively heated, with Macron and Le Pen in particular trading barbs, the debate did not reveal anything we did not already know. The debates agenda also lacked any focus on broader European issues and the current fragility of the EU. We would have been keen to gain further insight on how each potential president plans to engage with this issue. In particular, it would have been interesting to ascertain more concrete details from Le Pen’s concerning her Frexit plans as laid out in the National Front’s election manifesto.
Today, the single currency is enjoying a boost against the dollar with markets pricing in a stronger likelihood of a victory from Euro-centric candidate, Emmanuel Macron. At this stage, the election is rather looking like a three-horse race (Le Pen, Macron and Fillon) as o candidates such as Benoit Hamon and Jean-Luc Melenchon seem to be fading into the background. Hamon was the clear and outright loser of this debate. It is worth recalling that the socialist candidate, who was the victor of the left primary has now lost the support of Manuel Valls because of "diverging views”.debate. It is worth recalling that the socialist candidate, who was the victor of the left primary has now lost the support of Manuel Valls because of "diverging views”.
Today’s Key Issues (time in GMT):
- Jan Trade Balance, last -2447m EUR / 08:00
- Feb Money Supply M3 YoY, last 2,90% CHF / 08:00
- Fed’s Dudley Speaks on Reforming Bank Culture at Closed Event USD / 08:20
- Feb CPIH YoY, exp 2,20%, last 1,90% GBP / 09:30
- Feb CPI MoM, exp 0,50%, last -0,50% GBP / 09:30
- Feb CPI YoY, exp 2,10%, last 1,80% GBP / 09:30
- Feb CPI Core YoY, exp 1,70%, last 1,60% GBP / 09:30
- Feb Retail Price Index, exp 267,5, last 265,5 GBP / 09:30
- Feb RPI MoM, exp 0,80%, last -0,60% GBP / 09:30
- Feb RPI YoY, exp 2,90%, last 2,60% GBP / 09:30
- Feb RPI Ex Mort Int.Payments (YoY), exp 3,10%, last 2,90% GBP / 09:30
- Feb PPI Input NSA MoM, exp 0,10%, last 1,70%, rev 1,60% GBP / 09:30
- Feb PPI Input NSA YoY, exp 20,10%, last 20,50%, rev 20,10% GBP / 09:30
- Feb PPI Output NSA MoM, exp 0,30%, last 0,60% GBP / 09:30
- Feb PPI Output NSA YoY, exp 3,70%, last 3,50%, rev 3,60% GBP / 09:30
- Feb PPI Output Core NSA MoM, exp 0,20%, last 0,50% GBP / 09:30
- Feb PPI Output Core NSA YoY, exp 2,50%, last 2,40%, rev 2,50% GBP / 09:30
- Jan House Price Index YoY, exp 6,40%, last 7,20%, rev 5,70% GBP / 09:30
- Feb Public Finances (PSNCR), last -26.5b, rev -22.7b GBP / 09:30
- Feb Central Government NCR, last -27.8b GBP / 09:30
- Feb Public Sector Net Borrowing, exp 2.8b, last -9.8b, rev -11.7b GBP / 09:30
- Feb PSNB ex Banking Groups, exp 3.2b, last -9.4b, rev -11.0b GBP / 09:30
- Fed’s Dudley, BOE’s Carney Speak at Bank Ethics London Event USD / 10:35
- Mar CBI Trends Total Orders, exp 5, last 8 GBP / 11:00
- Mar CBI Trends Selling Prices, exp 32, last 32 GBP / 11:00
- Jan Retail Sales MoM, exp 1,50%, last -0,50% CAD / 12:30
- 4Q Current Account Balance, exp -$129.0b, last -$113.0b USD / 12:30
- Jan Retail Sales Ex Auto MoM, exp 1,30%, last -0,30% CAD / 12:30
- Conference Board China February Leading Economic Index CNY / 13:00
- Fed’s George Speaks in Washington on U.S. Economy and the Fed USD / 16:00
- Bank of Canada Deputy Governor Lawrence Schembri Speech CAD / 19:45
- Fed’s Mester Speaks at University of Richmond USD / 22:00
- 4Q BoP Current Account Balance, exp -$12.00b, last -$3.40b INR / 22:00
- Feb Tax Collections, exp 93000m, last 137392m BRL / 23:00
The Risk Today:
EUR/USD is challenging the resistance implied by its rising trendline (around 1.0795). A break of upside would signal persistent buying pressures. Key resistance is still given at a distance 1.0874 (08/12/2017 high). Strong support can be found at 1.0493 (22/02/2017 low). The technical structure suggests deeper increase towards resistance at 1.0874. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.
GBP/USD has successfully tested the support at 1.2110 and continues to bounce higher. A break of key resistance (at 1.2429) is needed to open the way for further strength. Yet, the pair remains in a clear downtrend suggesting short term correction. Key resistance can be located at 1.2570 (24/02/2017 high). Hourly support is at 1.2324 (03/17/2017 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY has failed to break key resistance given at 115.62 (19/01/2016 high) confirming persistent selling pressure. The pair remains stuck in sideways trading pattern between 111.36 and 115.62. Hourly support given at 112.27 (intraday low). Hourly resistance can be located at 113.57 (16/03/2017 high). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF has paused after sharp exit from uptrend channel. Hourly support is given at 0.9862 (31/01/2017 low) has been broken. Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to consolidate. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.