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UK CPI will set the tone for GBP today after a poor performance on Monday. US Fed ‘Beige Book’ is published this evening.

By Nick Parsons

After Monday’s very good day, the British Pound went from hero to zero on Tuesday, finishing equal bottom of the table with the New Zealand Dollar. The GBP/USD pair opened at 1.4335 then raced up to a high of 1.4375; not only higher than the previous day’s high, but the best level since the EU referendum back in June 2016. A sharp sell-off to 1.4290 was then seen after UK earnings and employment numbers were published and though the pound has rebounded overnight to be in top spot for the day so far, another disappointment from CPI could see it quickly reverse lower once more.

According to the Sunday Times at the weekend, “figures out on Tuesday are expected to show that average wages in February climbed 3% on a year earlier, the first time pay growth has outpaced the rise in consumer prices since January last year.” It was only half-correct in its view. Average earnings growth did, indeed, exceed inflation but the 2.8% y/y increase in February was only one-tenth above the 2.7% rise in the CPI. The good news is that pay is now growing at its fastest pace since August 2015 but the end of a squeeze on real living standards is still a very different thing to a noticeable and sustained improvement in purchasing power. And, with increases in mandatory pension contributions for many people effective in April, the benefit of higher headline wages will not be matched in take-home pay.

Separate figures on the labour market, meantime, show that the unemployment rate in the UK has hit a 42-year low of 4.2%. The number of people classed as unemployed has dropped by 136,000 over the last year, and now stands at 1.42 million whilst there are now 32.26 million people in work, 427,000 more than a year ago. This means the employment rate has hit 75.4%, the highest since records began in 1971. The Government was quick to highlight the numbers. The Secretary of State for Work and pensions said, “Another milestone for employment has been reached under this Government as employment reaches a record high, up 3.2 million since 2010 - the 16th time the employment record has been broken in the same period. That means on average, over 1,000 people have moved into work every day since 2010.” CPI figures are due this morning and though the consensus is for unchanged inflation at 2.7%, the GBP is likely to react strongly to a ‘miss’ in either direction. The Pound opens in Europe this morning with GBP/USD in the high-1.42’s with GBP/EUR in the mid-1.15’s.

After the first day of the week saw the DJIA up over 200 points and the S&P 500 index more than 20 points higher, the second day brought more of the same with the S&P back above 2700 for the first time since March 22nd and the VIX index of volatility of equity market volatility down at 15. The USD index against a basket of major currencies initially sold off from 89.00 to a low of 88.80 during the European morning but by mid-afternoon it had rallied up to 89.20 before finally ending unchanged on the day. Overnight in Asia, both stock index futures and the USD are very marginally higher.

The main trigger for the rally in the USD (apart from data disappointments in the UK and Eurozone) was a comment from US Treasury Secretary Mnuchin, who told CNBC that Trump's tweet on Monday about unfair FX competition was not a signal for a weaker dollar but a "warning shot" to Russia and China not to devalue their currency in the future. "They've used a lot of their reserves to actually support the currency. The President wants to make sure they don't change their plans, and he's watching it." On a separate issue, Mnuchin said rising economic growth will help pay for a temporary shortfall in tax receipts. "We're now at a point where we're comfortably within our 3 percent or higher sustained economic growth… The difference between 2.2 and 3 percent will pay for the tax cuts." He went on to claim that, “We're seeing very strong economic growth," he said. "We literally have met with hundreds of executives, small companies, big companies, and thousands of workers. We're beginning to see the impact of the tax cuts, specifically people investing large amounts of money back into the United States."

In incoming economic news, US industrial production rose a better than expected 0.5% m/m in March which took the y/y rate up to 4.3%; the fastest pace of growth since February 2012. Behind the headlines, however, there was a huge 3.1% m/m jump in energy output – entirely due to the pattern of weather in February and March – and manufacturing production rose a much more subdued 0.1% m/m. With capacity utilization rising three-tenths to 78.0% and housing starts very slightly stronger than expected, the Atlanta Fed nudged its Q1 GDP forecast back up to 2.0%. As well as three Fed speakers, the highlight of the day on Wednesday will be the Federal Reserve’s Beige Book on current economic conditions. The USD index opens in Europe this morning at 89.10.

Euro (EUR) After a quiet start to the week on Monday, EUR/USD began a rally which took it up more than half a cent to 1.2390; just above last Wednesday’s high and the best level in 2½ weeks. During the European morning on Tuesday, the euro extended its gains to 1.2410; the first time it had been on a 1.24 ‘big figure’ since March 28th. It subsequently gave back more than three-quarters of a cent to a low of USD1.2340 before rallying back to 1.2375 which is where it opens this morning after another very quiet session in Asia.

In economic news, the ZEW Indicator of Economic Sentiment for Germany once again fell sharply, dropping by 13.3 points compared to March and a huge 26.0 points when compared to February. The April indicator stands at minus 8.2 points, falling far below the long-term average of 23.5 points. The assessment of the current economic situation in Germany decreased by 2.8 points, with the corresponding indicator currently standing at 87.9 points. Commenting on their survey, the ZEW said, “The reasons for this downturn in expectations can mainly be found in the international trade conflict with the United States and the current situation in the Syrian war. The significant decline in production, exports and retail sales in Germany in the first quarter of 2018 is also having a negative effect on the future economic development.” The financial market experts’ expectations regarding economic development in the Eurozone also decreased considerably, with the indicator falling by 11.5 points to a current reading of just 1.9 points. The indicator for the current economic situation in the Eurozone improved slightly in April by 1.5 points to 57.7.

According to the latest Reuters poll, Eurozone economic growth, already moderating in part from a stronger currency, will take a further hit from the ongoing trade dispute between the United States and China. While the consensus for growth in the latest poll of over 100 economists taken April 6-16 was little changed from a poll last month, the dispersion has increased and the range of forecasts shows lower highs and lower lows for growth in the region compared with last month. Full-year GDP growth is expected to average 2.3 percent this year and 2.0 percent next whilst inflation is predicted to average 1.5 percent this year, 1.6 percent next and 1.7 percent in 2020. The EUR opens in London this morning at USD1.2335 with GBP/EUR in the mid-1.15’s.

After a quiet start to the week on Monday, EUR/USD began a rally which took it up more than half a cent to 1.2390; just above last Wednesday’s high and the best level in 2½ weeks. During the European morning on Tuesday, the euro extended its gains to 1.2410; the first time it had been on a 1.24 ‘big figure’ since March 28th. It subsequently gave back more than three-quarters of a cent to a low of USD1.2340 before rallying back to 1.2375 which is where it opens this morning after another very quiet session in Asia.

In economic news, the ZEW Indicator of Economic Sentiment for Germany once again fell sharply, dropping by 13.3 points compared to March and a huge 26.0 points when compared to February. The April indicator stands at minus 8.2 points, falling far below the long-term average of 23.5 points. The assessment of the current economic situation in Germany decreased by 2.8 points, with the corresponding indicator currently standing at 87.9 points. Commenting on their survey, the ZEW said, “The reasons for this downturn in expectations can mainly be found in the international trade conflict with the United States and the current situation in the Syrian war. The significant decline in production, exports and retail sales in Germany in the first quarter of 2018 is also having a negative effect on the future economic development.” The financial market experts’ expectations regarding economic development in the Eurozone also decreased considerably, with the indicator falling by 11.5 points to a current reading of just 1.9 points. The indicator for the current economic situation in the Eurozone improved slightly in April by 1.5 points to 57.7.

According to the latest Reuters poll, Eurozone economic growth, already moderating in part from a stronger currency, will take a further hit from the ongoing trade dispute between the United States and China. While the consensus for growth in the latest poll of over 100 economists taken April 6-16 was little changed from a poll last month, the dispersion has increased and the range of forecasts shows lower highs and lower lows for growth in the region compared with last month. Full-year GDP growth is expected to average 2.3 percent this year and 2.0 percent next whilst inflation is predicted to average 1.5 percent this year, 1.6 percent next and 1.7 percent in 2020. The EUR opens in London this morning at USD1.2335 with GBP/EUR in the mid-1.15’s.

After its choppy start to the week, the Australian Dollar is still struggling to gain traction in either direction, doubtless frustrating many intra-day traders. It closed little changed at USD0.7775 on Monday evening and on Tuesday it was down almost to 0.7760 then up to 0.7790 to be back pretty much where it began. The Aussie appears unsure whether to take its cue from improving sentiment in global equity markets and lower levels of volatility, a somewhat lower gold price, or continued caution from the Reserve Bank on the pace of progress towards its inflation and output goals. AUD/USD has been stuck within a 30 pip ranges for the whole of the last 36 hours, though the AUD/NZD cross has picked up to a recent high just under 1.0600.

In economic data this morning, the six month annualised growth rate in the Australia’s Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from 1.43% in February to 0.69% in March. The analysts at Westpac note, “Drivers of the slowdown in the month have been from the domestic components – a slowing labour market; and some weakness in housing while rising short term interest rates have reflected liquidity pressures from global markets.” They go on to say that, “It appears likely that the Reserve Bank will lower its upbeat 3.25% growth forecast for 2018. The latest minutes from the Board refer to growth as “expected to exceed potential growth” (consistent with the signal from the Leading Index). However, with potential growth at 2.75% we expect the RBA will lower its growth forecast for 2018 to 3.0%.” In separate data from the Department of Jobs and Small Business, the internet job vacancy index rose 0.9% in March and has now risen for 18 consecutive months; the longest such run since March 2011.

In its massive 280-page on the World Economic Outlook released yesterday) we read it so you don’t have to!) the International Monetary Fund (IMF) upgraded its forecasts for economic growth in Australia to 3% this year, a sharp rise from 2.3% in 2017, and up from the 2.9% rate expected in February. Next year, Australia’s GPD is forecast to grow by 3.1%. The numbers are pretty much in line with the federal government’s mid-year budget update which had GDP forecast to grow by 2.5% in 2017-18 and 3% in 2018-19 after growth of 2% in 2016-17. The IMF sees the consumer price index increasing 2.2% this year, and then 2.4% in 2019. Inflation is currently running at 1.9%. The Australian Dollar opens this morning in Europe in the high-USD 77’s with GBP/AUD at 1.84..

There’s no stopping the Canadian Dollar at the moment as it improved one place on Monday’s finish to end on Tuesday at the top of our one-day performance table and up against all the major currencies we follow closely here. USD/CAD opened around 1.2565 and really began to accelerate to the downside in the New York afternoon, reaching a low of 1.2530; its lowest point in just over two months. GBP/CAD broke down through 1.80 and went on to reach a low just under 1.7910 before then rallying around half a cent.

The International Monetary Fund yesterday released its latest World Economic Outlook to coincide with its Spring Meeting in Washington which takes place in April every year. It kept its global growth forecasts for both 2018 and 2019 unchanged at 3.9% but warned that, “The prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail growth prematurely.” The IMF projects moderate economic growth for Canada this year and next, albeit at a pace slower than last year and significantly behind that in the United States. The IMF sees GDP growth in Canada of 2.1% this year and 2.0% next year. That represents a slight downgrade from January's outlook of 2.3% forecast for this year, and is noticeably less than the strong three per cent growth Canada experienced in 2017.

The Bank of Canada holds its monetary policy meeting today having already hiked rates three times since July 2017. Economists from 10 of the 11 primary dealers of Canadian government securities told the Wall Street Journal they anticipate the BoC will keep its key rate at 1.25% this week. Morgan Stanley is one of the dissenting voices saying “We expect the Bank of Canada (BoC) to raise interest rates at its April meeting by 25 basis points, to 1.5 per cent… Data on economic activity have thus far come broadly in line with the BoC’s expectations, opening a window for the governing council to deliver a second rate hike this year. We expect the data will soon begin to disappoint relative the BoC’s expectations and, as such, we look for the BoC to pause on hikes thereafter in order to assess the effects of policy tightening, and we continue to expect no further rate hikes until next year.” So, even though, they are forecasting a rise in rates, this is what in currently-fashionable terminology might be termed a ‘dovish hike’. The Canadian Dollar opens in Europe this morning with USD/CAD in the high-1.25’s and GBP/CAD in the high-1.79’s.

After Monday’s poor session in which it finished second from bottom on our one-day performance table, the Kiwi Dollar had an even worse day on Tuesday, sharing bottom spot with the GBP. A high in the Asian session of USD.7270 was as good as it got for the flightless bird which then tumbled to a low just under 0.7230 in the European afternoon before a modest rally to 0.7240. The AUD/NZD cross -which last week was on a 1.04 ‘big figure’ for a couple of hours - almost touched 1.06 before closing in New York around 1.0590 which is where it opens in Europe this morning after a very quiet session in Asia.

The International Monetary Fund has criticized New Zealand’s ban on home sales to foreigners, saying it’s unlikely to improve housing affordability. After concluding its annual Article IV mission to New Zealand, the IMF said that, “Foreign buyers seem to have played a minor role in New Zealand’s residential real estate market recently... If the government’s broader housing policy agenda is fully implemented, that would address most of the potential problems associated with foreign buyers on a less discriminatory basis.” Proposed changes to the Overseas Investment Act, which the government says will bring New Zealand into line with neighboring Australia, will classify residential land as “sensitive,” meaning non-residents or non-citizens can’t purchase existing dwellings without the consent of the Overseas Investment Office. While non-resident foreigners will be allowed to invest in new construction, they will be forced to sell once the homes are built. Elsewhere in the report, the IMF notes that economic growth should remain around 3 percent in the near term, with risks broadly balanced and on monetary policy it warns against both precautionary further easing or premature tightening.

Most of the major bank forecasts for tomorrow’s quarterly CPI numbers are now published. ANZ expect headline CPI rose 0.4% q/q in Q1, which would see annual inflation slow from 1.6% to 1.0% y/y – a touch below the RBNZ’s expectation of 1.1%. They say, "The fall in annual headline inflation is more noise than signal. Nonetheless, evidence of a broadening in domestic price increases beyond housing remains elusive. Core inflation measures are expected to be broadly stable." BNZ forecast a 0.3% increase for the quarter, a result that would pull annual inflation down to 0.9% and highlight a very large drop in education prices reflecting recent policy changes making first year tertiary education free. Over at Westpac, meantime, they also factor in the fall in education prices but see a 0.5% increase in the March quarter to take the annual rate down to 1.1%. The Kiwi Dollar opens in London this morning at USD0.7335, with GBP/NZD around 1.9500.