The situation in Ukraine ground on over the weekend with pro-Russian sympathisers taking a delegation of European military observers hostage in the east of the country. It will be only a matter of time until further sanctions are enacted by the US and EU in our eyes – a negative for the European economy as a whole on trade grounds we believe – but until then, stories like this will be commonplace. There has been little movement outside of Russian assets by these recent developments and we would expect that the rest of the market sphere will pay little attention again today.
This week is a very important week for G10 currencies given the lack of volatility that they have been experiencing in the past few months or so. The focus will remain on the euro and its inflation number on Wednesday morning. It is our belief that we will not see the ECB change its policy this week, mainly as a result of an uptick in inflation through April courtesy of Easter spending. Consensus estimates put CPI at 0.8% through the past month, 0.3% higher than March’s and, although still a fair way away from the ECB’s 2% inflation target, a lot healthier. Anything higher and the market will be looking to take EUR/USD to the 1.40 level and GBP/EUR back towards 1.20.
Likewise in sterling crosses, a piece of data due this week could easily be the ticket to a break-out of the ranges that have been patiently occupied for a couple of months now. Friday’s retail sales numbers saw a slight increase in sales, the fifth consecutive monthly gain. Increased confidence around the breadth and scale of the UK recovery combined with the first rise in real wages in 5 years and a significant wealth effect on house price increases to push the UK retail sector onward in March. Thoughts had been that consumers would take a slight pause in March from retail – a breather before the late Easter spending spree – but sales of clothing increased by 3.1% on the month and took the overall average into positive territory.
The Bank of England said that they expect that growth in Q1 and Q2 of this year will be in and around the 1.0% mark and the combination of PMI sentiment and ONS output data would suggest that this is about right. Our forecast for Tuesday’s figure is preliminary growth in Q1 of this year to be 0.8%.
The dollar needs volatility to extend any recent gains and this week is set up for a strong dollar. Friday’s payrolls number is of course the showstopper, with traders looking for a figure of 215,000 jobs – a punchy expectation. Before then we have a Federal Reserve meeting that will see another $10bn reduction in asset purchases; taking the total down to $45bn a month. A couple of hours before that we get the preliminary reading of US GDP for Q1; the consensus estimate is for an expansion of 1.2% annualised – less than what Spain was able to achieve according to its own preliminary number released last week.
Add in the first look at April growth via manufacturing PMI numbers on Thursday and we have a heady cocktail of potential currency volatility.
Today is the quietest day of the week however but we would expect some positioning to take place in preparation of tomorrow’s UK GDP and German inflation readings – we would suspect that these will be GBP/EUR negative.
