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GBP off to a solid start on Wednesday ahead of UK economic data. US CPI due this afternoon.

By Nick Parsons

The British Pound had another day of very mixed fortunes on Tuesday, rising against the USD, little changed against the EUR but down between four and five-tenths of a point against the CAD, NZD and AUD. The GBP/USD exchange rate reached a best level of 1.4185 – its highest in almost two weeks – but GBP/AUD and GBP/NZD both fell a full cent on the day. Overnight in Asia the Pound has done well; rising against everything except the EUR and as we write, GBP/USD is now testing Tuesday’s highs.

In an interview with Reuters, Bank of England MPC member Ian McCafferty said that UK interest rates should be raised again without delay. “We shouldn’t dally when it comes to tightening policy modestly.” McCafferty said he could not be certain about whether to vote again for a rate rise until May’s policy meeting, but there had been no data or Brexit developments so far to make him think he was wrong in March to vote to raise rates to 0.75 percent. McCafferty said that as well as the boost from the world economy’s strong recovery, he thought there was now no slack left in Britain’s labour market. Unemployment at its lowest rate since 1975, skill shortages and signs that employers were resorting to higher wage offers to lure staff from rival firms or stop them from leaving would also create inflation pressure. “It’s not wages suddenly bursting away, but it gives you a modest upside risk.” Known as one of the BoE’s most hawkish policymakers, McCafferty said there had been a case for following up November’s rate move with another hike as early as February. But he held off to avoid surprising households who had been told by the BoE that it plans to raise rates only gradually.

On the UK economic calendar today, we have the merchandise trade numbers and the industrial production data but perhaps the most important might be the NIESR’s estimate of GDP in the first quarter. The National Institute has had a very good record over the last few years of predicting the official GDP numbers and it is updated every month with an estimate of growth over the previous three months. Today will be one of the four occasions each year when its estimate lines up in time with the official numbers. Consensus looks for a 0.3% q/q increase though the bad weather might introduce some downside risk to this view. The Pound opens in Europe this morning with GBP/USD in the high-1.41’s with GBP/EUR in the high-1.14’s.

Once again, all the action appears to be in the US equity market rather than on the foreign exchanges. After its’ 400-point rally and sell-off into Monday’s close, the DJIA initially jumped 300 points in response to soothing Chinese words on trade and at one point extended these gains by a further 200 points. The US Dollar’s index against a basket of major currencies rose from 89.45 to 89.55 in early trading but then fell steadily during the day to 89.25 having at one point reached a near-one week low of 89.15. Overnight in Asia, the USD is steady around this lower level but looks technically weak and could easily break down on to an 88 ‘big figure’.

Speaking on Bloomberg television from Beijing, Federal Reserve Bank of Dallas President Robert Kaplan said trade issues between the U.S. and China won’t get resolved soon and warned of potential damage if the dispute is prolonged. “I really do think it is too early to judge how this is going to affect the economy. But I do think the rhetoric, if it goes on for long enough at this level, is having somewhat a chilling effect… I’m still hopeful when we look back a year or two from now you’ll see very little actually done in the way of tariffs that were implemented,” Kaplan said. “That would be my base case, and I think we are in the early innings of this.” Equity markets will hope very much that his judgment proves correct

As well of the Minutes of the March FOMC meeting, today brings the latest US inflation figures.Consensus expectations are for the headline rate to edge up from 2.2% to 2.3% with the core, ex-food & energy, measure seen rising from 1.8% to 2.1%. The Federal Reserve Bank doesn’t have a CPI target – instead it focuses on PCE – but numbers above 2% for both the headline and core will cement expectations of further monetary policy tightening whatever the huge day-to-day swings of the US stock market. The USD index opens in Europe this morning at 89.15.

The Single European Currency finished around the middle of the FX pack on Tuesday, up against the USD, little changed against the GBP but down against all three of the ‘Commonwealth Currencies’. EUR/USD opened around 1.2320 and after a very steady session through Asia and the European morning, then took off to a high of 1.2370 before then settling back to 1.2345 after an unusually public spat between ECB Council member Ewald Nowotny and his colleagues. Overnight in Asia, the EUR is once more probing Tuesday’s highs.

In very uncontroversial early remarks, Mr Nowotny said, “The normalisation [of monetary policy] requires a delicate balancing of measures as well as careful sequencing in time,” saying there were risks to both being too aggressive with the process or starting it too late. As for the impact of trade tariffs, “The direct effects might be on the exchange rate side but this is difficult to see or to forecast because today we have so many linkages, we have long production chains...It might have negative effects on financial stability, but effects on monetary policy are not very clear.” However, the Austrian central banker then gave an interview to Reuters in which he said that the ECB’s 2.55 trillion euro ($3.1 trillion) bond-buying program would be wound down by the end of this year, which would then pave the way for the first rate rise since a fumbled move in 2011. He called on the ECB to get on with the process to ensure it can take a gradual approach, and to start with the deposit rate, which has been in negative territory since mid-2014. “I would have no problem with moving from -0.4 percent to -0.2 percent as a first step and then, as a second step, include the (main refinancing) policy rate.This is the structure. The exact timing? It’s too early to tell you.”

In a very unusual move after EUR/USD had jumped around half a cent, the ECB - which rarely comments on statements from individual policymakers - distanced itself from Nowotny’s comments. “Governor Nowotny’s views are his own. They do not represent the view of the Governing Council,” an anonymous spokesperson said. ECB Members Nuoy and Hakkarainen are scheduled to speak today and analysts will be watching to see if they deliberately distance themselves from Mr. Nowotny’s remarks. The EUR opens in London this morning at USD1.2365 with GBP/EUR in the high-1.14’s.

The price action for the AUD/USD pair on Tuesday was quite striking – it made successive highs in the Asian, European then North American time zones. Asia saw the pair rally from 0.7695 to 0.7735. Europe then took it up to 0.7745 and in New York it traded just over 0.7765; its highest level since March 22nd. With AUD/NZD steady at 1.0635, the Aussie Dollar shared top spot with its Kiwi cousin at the top of our one-day performance table. Overnight in Asia, the AUD has been unable to hold on to Tuesday’s best levels and GBP/AUD is back up to 1.83.

In economic news today, the Melbourne Institute and Westpac Bank survey of 1,200 people showed its index of consumer sentiment dipped 0.6 percent in April, from March when it rose 0.2 percent. Sluggish wage growth, rising living costs and high levels of household debt have been weighing on the consumer mood, offsetting broad-based strength in employment. The concerns showed in a sharp 5.8 percent drop in the survey's index of family finances over the next 12 months, which outweighed gains in all the other measures. The survey's barometer of economic conditions over the next 12 months edged up 0.6 percent and the outlook for the next five years bounced 2.9 percent.

Commenting on the data, Westpac said, “Sentiment continues to hold in slightly optimistic territory with April marking the fifth consecutive month the Index has been above the 100 level, indicating optimists outnumber pessimists. That is a more encouraging signal than we saw in most of 2017 when pessimists outnumbered optimists. However, the 10% rally we saw in the Index through the second half of 2017 has stalled. Indeed, since the beginning of the year the Index has fallen by around 2.5%. Certainly, at 102.4 the Index is still well below the strong 105–115 levels typically associated with a robust consumer. The Reserve Bank Board next meets on May 1.There is little chance of a move by the Board at this meeting. Indeed, markets which six months ago were fully priced for a rate hike by August 2018 are now not priced for a move until mid- 2019. Westpac continues to expect the cashrate will remain on hold through 2018 and 2019.” The Australian Dollar opens this morning in Europe in the mid-USD 77’s with GBP/AUD at 1.83.

It was almost a three-way split at the top of our leader board on Tuesday, though the Canadian Dollar was ultimately just edged out by both the AUD and NZD. Just before Monday’s North American close, USD/CAD printed on a 1.26 ‘big figure’ for the first time since late February. Just 24 hours later, it was moving on to 1.25 for the first time since February 20th. The strength of the CAD dragged the GBP/CAD cross rate down to a low of 1.7840; its weakest since March 13th.

After Monday’s very healthy BoC Business Outlook Survey, the focus yesterday switched towards the housing market. January’s building permit numbers had been unusually strong with a 5.6% m/m gain so it was always likely that the February numbers would show some pullback. The outturn was that Canadian municipalities issued $8.2 billion in building permits in February, only a 2.6% m/m drop. Single-family homes as well as the commercial and institutional components saw lower levels of construction intentions. The total value of building permits decreased in six provinces in February. The largest declines were in Quebec and Ontario, while Alberta reported the largest increase followed by Manitoba. A separate report from the Canada Mortgage and Housing Corp said housing starts slowed slightly in March. The seasonally adjusted annual rate of starts declined to 225,213 in March from February’s upwardly revised 231,026 had forecast a sharper decline to 218,000 homes.

More data on housing comes later this week. Thursday is new home prices and Friday is nationwide home sales. The Canadian Dollar opens in Europe this morning with USD/CAD in the high-1.26’s and GBP/CAD in the low-1.79’s.

Having shared top spot with the Canadian Dollar on Monday, the New Zealand Dollar shared the same place with the Aussie Dollar on Tuesday. The AUD/NZD cross traded in a range from 1.0515 to 1.0555 but finished the day pretty much where it had begun at 1.0535. NZD/USD, meantime, extended its gains to a high of 0.7375; its best level since February 19th whilst the GBP/NZD cross hit a low just below 1.9120; its weakest since mid-March.

In economic news today, ANZ released its wonderfully-named Truckometer index. ANZ say this is a set of two economic indicators derived using traffic volume data from around the country. Traffic flows are a real time and real-world proxy for economic activity - particularly for the New Zealand economy, where a large proportion of freight is moved by road. It represents an extremely timely barometer of economic momentum. The ANZ Heavy Traffic Index shows a strong contemporaneous relationship to GDP, while the ANZ Light Traffic Index has a six month lead on activity as measured by GDP. Their latest update shows, "The Heavy Traffic Index fell 0.3% m/m in March, to be down 0.7% for the quarter. This isn’t a strong signal for GDP growth, but the index has been volatile lately. With anecdote suggesting a decent quarter, we will wait for more pieces of the GDP puzzle before drawing any conclusions. On the other hand, the Light Traffic Index bounced 2.2% m/m, after a few months of fairly lacklustre performance. This index is giving a softer signal for growth from mid-year, but the bounce-back is encouraging."

The RBNZ announces on its website that Assistant Governor and Head of Economics John McDermott will deliver a speech on Thursday titled “Inflation targeting in New Zealand: an experience in evolution.” We’ll also get the March credit card spending numbers. The Kiwi Dollar opens in London this morning at USD.7355, with GBP/NZD around 1.9290.