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GBP hit by soft CPI data and now awaits weather-hit March retail sales.

By Nick Parsons

After finishing equal bottom of the table with the New Zealand Dollar on Tuesday, the GBP looked set to repeat the same dismal performance on Wednesday until it managed to close up against a very out of favour Canadian Dollar. GBP/USD spent most of the Asian session in a tight range either side of 1.4300 but when the UK CPI figures were published at 09.30 local time in London, it plunged more than a cent to a low of 1.4180. GBP/AUD lost 1 ½ cents to 1.8250 whilst GBP/NZD fell on to a 1.93 ‘big figure. There has been little respite overnight in Asia and though trading ranges have not been wide, the GBP has again lost ground against all the major currencies.

UK inflation figures came in not just lower than consensus expectations, but lower than the whole range covered by most professional forecasters. Prices rose just 0.1% in March to take the annual rate of inflation down from 2.7% to 2.5% against expectations that it would be unchanged at 2.7%. This means that CPI inflation is at its lowest in a year and March’s fall in the annual rate is the 2nd consecutive month in which the annual rate has fallen; we haven’t seen that since August – September 2015. The Office for National Statistics said that women’s clothing prices rose slower than usual for this time of year, rising by 0.7% between February and March 2018 compared with a larger rise of 2.0% between the same two months in 2017. Alcohol and tobacco also helped ease inflation pressures, with tobacco duty rises linked to the Budget being announced in November 2017 instead of March 2018.

It is not only investors holding British Pounds who are left nursing losses. The Bank of England has also suffered yet another blow to its credibility, having publicly agitated for at least two months about the likelihood of a rise in interest rates at its May MPC meeting. This might of course still happen, but the probability of it now is much lower than it was just a few days ago. And, with inflation on a sharp downtrend towards its 2% target, the feeling will persist that a rate hike in May is designed to save face on the MPC rather than being truly ‘data dependent’. The Pound opens in Europe this morning with GBP/USD at 1.42 with GBP/EUR in the high-1.14’s.

US equity markets had a much more subdued day on Wednesday, with barely 100 points separating the high and low for the Dow Jones Industrial Average. The USD index against a basket of major currencies had finished unchanged on Tuesday around 89.05 having at one point been as low as 88.80, but yesterday it rose to a high just over 89.30 before settling up just one-tenth of a point around 89.20. Overnight, the USD has been very steady and its index is unchanged from Wednesday’s closing level.

Although Tuesday was the deadline for filing tax returns in the United States, the Internal Revenue Service extended this to Wednesday due to a computer malfunction. Last year, about 90 percent of tax returns submitted by April 21 were e-filed, according to IRS data so the extension was swiftly expedited. With ‘Tax Day’ being so topical, the Administration was not slow to hit the social media channels. Vice-President Mike Pence tweeted, “Thanks to the historic TRUMP TAX CUTS, today marks the last time the American people will file taxes under a complicated & outdated tax system. Our Tax Cuts– the largest in American history– will save YOU money, increase opportunity & create more JOBS for American workers.” The White House itself said, “When we began our push for tax cuts, I promised that our bill would result in more jobs, higher wages, and tremendous relief for middle-class families, and that is exactly what we have delivered.”

With no incoming monthly economic data, the highlight of the day was the release of the Federal Reserve’s so-called Beige Book. This reported activity remained at “a modest to moderate pace” in March and early April, the same rate as earlier in the year. Overall wage growth was said to be modest, and price gains seen as moderate. Wage pressures “did not escalate,” although labour markets were seen as tight, with continued reports of shortages for high-skilled workers. Contacts in nine of the dozen Fed regional banks expressed concerns about trade tariffs — with 36 mentions of the word in the report, whilst business owners were upset with the price rises for metals in the wake of the Trump administration’s decision to place penalties on steel and aluminum imports. The USD index opens in Europe this morning at 89.20.

After a sharp rally and subsequent drop before ending unchanged on Tuesday, EUR/USD repeated the price action on Wednesday, albeit within an overall narrower trading range from 1.2355 to 1.2395 before closing with no net gain or loss around 1.2375. GBP/EUR was a big casualty, however, falling almost a full cent from 1.1565 to 1.1470 and his has failed to recover any lost ground in the overnight session in Asia.

Final Eurozone CPI figures showed inflation one-tenth below what had been expected at the time of the ‘flash estimate’ back on April 4th. The statisticians estimated CPI would be at an annual pace of 1.4% in March but the final number this morning showed a rate of just 1.3%. The highest contribution to the annual inflation rate came from services (+0.67 percentage point), followed by food, alcohol & tobacco (+0.41 pp), energy (0.20 pp) and non-energy industrial goods (0.07 pp). Services inflation appears to have risen to 1.5% largely due to early timing of Easter this year, lifting prices of airfares and accommodation services, whilst the usual rebound in clothing prices from the January sales was less visible than in previous years. Across the European Union (rather than just the Eurozone) lowest annual rates were registered in Cyprus (-0.4%), Greece (0.2%) and Denmark (0.4%). The highest annual rates were recorded in Romania (4.0%), Estonia (2.9%), Slovakia and Lithuania (both 2.5%). Compared with February, annual inflation fell in six Member States, remained stable in six and rose in fifteen.

Separate figures from Eurostat showed that construction output in the Eurozone fell by a seasonally-adjusted -0.5% in February, largely due to civil engineering falling by 1.7%, while building construction rose by 0.1%. Although the figures are seasonally adjusted, they can still be heavily affected by weather conditions, especially as those as extreme as seen in Europe over the Winter months. January was relatively mild but February was exceptionally cold and it would not be a big surprise to see the March data next month similarly affected by adverse weather. In year-over-year terms, construction output is up 0.4% but we may have to wait a while longer before more meaningful, distortion-free comparisons can be made. The EUR opens in London this morning at USD1.2385 with GBP/EUR in the high-1.14’s.

After two days of essentially directionless, albeit somewhat choppy trading, the Aussie Dollar yesterday finally threatened to break down below the 30 pip range from 0.7760 to 0.7790 in which it had been stuck for more than 36 hours. During the European morning, the pair briefly dipped below 0.7750 but the move was very quickly reversed and by the afternoon it was back up once more testing the topside at 0.7790 before closing, yet again, within 10 pips of where it had begun. The AUD finished higher also against the NZD, CAD and GBP and claimed second place on our one-day performance table. Overnight in Asia, The AUD was initially sold down to 0.7765 after the labour market report was published but has subsequently rebounded strongly to be on a US 78 cents ‘big figure’ for the first time since last Friday.

In economic data this morning, the March labour market report was quite a bit softer than had been expected. Total employment rose by just 4,900 against consensus expectations of a 21,000 increase. More disappointingly, February’s initially-reported 17,500 gain was revised to show a drop of 6,300 which brought to an end what had previously been a run of 17 consecutive monthly increases in employment. The main revisions came in full-time jobs which were now estimated to have gained only 20,100 in February, instead of the initial outsized jump of 64,900. March was even worse with full-time positions falling 19,900. The unemployment rate was steady at 5.5 percent, after a downward revision to February. It has hovered between 5.4 percent and 5.6 percent for 11 months now whilst the participation rate dipped to 65.5 percent, having peaked at 65.7 percent in January as more women entered the labour force.

In his speech in Perth, RBA Governor Phil ‘slow and gradual’ Lowe had predicted further gains in jobs, even as he reiterated there was no strong case for a rate rise given wage growth continued to lag. After the jobs report today, the market-derived probability of an interest-rate hike by December is only 22%; suggesting investors have all but given up on looking for RBA action this year. The Australian Dollar opens this morning in Europe at US 78 cents with GBP/AUD at 1.82.

We wrote in our North American commentary yesterday morning that, “it seems investors have begun to lock-in profits on long CAD positions ahead of today’s Bank of Canada policy meeting.” They will certainly be glad they did as the Canadian Dollar slumped to the bottom of our one-day performance table on Wednesday. USD/CAD rose from a low immediately prior to the interest rate announcement of 1.2555 to a high just under 1.2660. AUD/CAD jumped more than three-quarters of a cent to 0.9845 whilst NZD/CAD rose from 0.9200 to a best level just under 0.9270. Overnight in Asia, the CAD has improved from its worst levels and USD/CAD is down around a quarter of a cent from yesterday’s high with GBP/CAD still below 1.80.

As expected by the vast majority of analysts, the Bank of Canada left its overnight target rate of interest unchanged at 1.25%. Its Statement noted that, “interest rates remain very low relative to historical experience. This is because the economy is not yet able to remain at full capacity on its own. Furthermore, the sustainability of this level of activity is not assured; although we expected the economy to moderate in the second half of 2017, that moderation has extended into early 2018 and has been more pronounced than expected.” Blaming this on two exceptional factors – changes in mortgage rules and transport bottlenecks – the BoC said, “Accordingly, we expect a strong rebound in the second quarter after a lacklustre first quarter, with an average growth rate of about 2 per cent in the first half of the year and a return to near-potential growth thereafter. Fiscal stimulus, both provincial and federal, is playing a role in this forecast. We will be monitoring the data for the second quarter very closely in the weeks ahead.”

In terms of forward guidance, and though Governor Poloz personally doesn’t like the concept, the Statement went on to say that, “Assuming our forecast remains on track, it is Governing Council’s view that interest rates will need to move higher over time to keep inflation on target… Most of our deliberations, therefore, concerned the appropriate pace of interest rate increases. As we have said repeatedly in the past, this is an intensely data-dependent process of risk management.” Weighing up the risks around capacity constraints, inflation dynamics, wages and the sensitivity of the economy to interest rates given the high level of household debt, The BoC concluded that, “higher interest rates will be warranted over time… but the Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data.” The Canadian Dollar opens in Europe this morning with USD/CAD in the low-1.26’s and GBP/CAD in the low-1.79’s.

After finishing second from bottom and then bottom of our one-day performance table in the first two days of the week, the Kiwi Dollar improved marginally to third-last on Wednesday; rising against the CAD and GBP but lower against the AUD, EUR and US Dollar. NZD/USD opened around 0.7340 but fell to a low during the London morning just below 0.7310; its weakest in 8 days before finishing around 0.7320. Overnight in Asia it has once again tested yesterday’s lows but then rebounded to 0.7330.

The long-awaited Q1 CPI figures were finally released overnight. In our preview yesterday, we noted BNZ had picked a 0.3% quarterly increase, ANZ had gone for +0.4% and Westpac +0.5%. The prize must go to Westpac who correctly forecast both the quarterly increase and the annual rate of 1.1%; down from 16% in the December quarter. Government-influenced price changes had the biggest impact on the numbers, with higher cigarette and tobacco prices being countered by cheaper tertiary education. The annual tobacco tax increase on 1 January 2018 lifted quarterly inflation, with prices up 10 percent. The average price for packet of 25 cigarettes was $35.14 in March, compared with $31.68 in December. Prices for tertiary education fell 16 percent in the March 2018 quarter. This is the first time this series has fallen since 2003; it was due to the introduction of the Government's fee-free first year policy. The policy applies for all New Zealand secondary students finishing school from 2017 onwards, and adults who previously studied for less than half a full-time year of tertiary education or industry training.

Elsewhere in the comprehensive inflation numbers, higher prices for accommodation services and petrol also contributed to the quarterly CPI rise, but they were slightly offset by seasonal falls for international airfares whilst housing and household utility prices increased 3.1 percent in the March 2018 year, led by construction and rents. Inflation in New Zealand is now close to the bottom of the RBNZ’s 1-3% target range though the Central Bank will probably take some comfort from the fact that tradable prices — those largely determined by offshore factors — fell 0.4% over the year, helping to offset a 2.3% increase in non-tradable prices over the same period. Speaking on NZ radio, RBNZ Governor Adrian Orr said he expected, “very benign inflation going forward without doubt, as we’ve forecast”. He added that “what really matters is the confidence and expectation and belief that we are aiming for that midpoint of 2 percent all of the time.” And he pledged that “we are doggedly determined to aim for two percent, but the accuracy around…that is very limited.” The Kiwi Dollar opens in London this morning at USD0.7325, with GBP/NZD around 1.9390.