Wednesday 29 March 2017

Ulster Bank Markets Daily Top Three

Simon Barry

Janet Yellen
Janet Yellen

Sterling giving back some of last week’s gains

Sterling’s performance last week benefited from the support provided by stronger than expected official UK data in a number of areas, including inflation, the jobs market and retail sales.  The stronger data helped lift the UK unit off post-referendum lows of 87.25p vs. the euro early in the week to trade sub 86p at one point after Thursday’s upbeat retail figures.  Similarly, GBP/USD moved from below $1.2875 early in the week to a late-week high of over $1.3175.  While we acknowledge the stronger-than-expected performance in these areas of the economy, we are reluctant to read too much into this resilience given that these indicators largely provide a rear-view mirror view of the economy’s performance.  More timely and more forward-looking surveys highlight that the UK is very likely to experience a material weakening of growth in the months ahead, and we continue to think that the risks around the UK economic outlook and that for sterling are skewed to the downside.  Indeed, sterling has started to give back some of last week’s gains, opening at 86.35p and $1.3065 against the euro and dollar respectively.

Fischer comments provide support for the dollar

Following on from comments from New York Fed chief Bill Dudley last week, Fed Vice Chairman Stanley Fischer became the latest influential Fed official to offer a less-than dovish commentary on the US outlook.  Fischer said that “we are close to our targets” and that “looking ahead, I expect GDP growth to pick up in coming quarters”.  The Dudley and Fischer comments suggest the Fed might be a little closer to raising rates than markets have been presuming (the next hike is priced to arrive in the second half of next year), with Fischer’s observations generating a bit of early-week upside for the greenback which opens about 0.5% higher against the euro (at $1.1280) and sterling (at $1.3070).

Yellen’s highly anticipated Jackson Hole speech and Eurozone PMI surveys in focus this week

Since the release of the FOMC July meeting minutes last week, there has been speculation regarding whether Fed Chair Yellen sides with the camp who favour a “wait-and-see” approach going forward, or sympathises more with an argument that “economic conditions would soon warrant taking another step in removing policy accommodation”. Analysts will examine every word of her Jackson Hole speech on Friday in an attempt to gauge which way she leans. Given that markets have been running with a dovish interpretation of the minutes, there may be some upside risk for US interest rate markets and the dollar, perhaps in line with the tone set by Fischer’s weekend comments. Meanwhile, investors will also be keen to see whether Euro Area August preliminary PMI and consumer confidence surveys continue to display resilience to Brexit related risks.

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