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After months of waiting, this week finally sees the culmination of 2016’s most important political event; the inauguration of US President-elect Donald Trump. Although likely to be one of this year’s biggest events, Trump faces the possibility of being overshadowed by an announcement closer to home.
UK Prime Minister Theresa May’s Brexit speech on Tuesday is likely to provide the largest insight to date of her objectives for the UK’s separation from the EU, possibly confirming she is willing to leave the European single market in order to achieve her desire to obtain full control over Britain’s borders – a ‘Hard Brexit’. In anticipation of the speech, Pound Sterling early on Monday morning dropped to its lowest level against the US Dollar since October’s flash crash. However, the speech is likely to lack specific details of the UK’s negotiation tactics with their European counterparts, leaving markets wanting of more details.
In a move to challenge this, Chancellor Phillip Hammond has started to outline his vision for a post-EU Britain, stating that he may look to undercut the European corporate tax rate in order to attract the world’s largest companies should the UK be unable to stay within the single market. This trickling of information, while intended to promote confidence in UK currency and equity markets, may in fact result in increased volatility in GBP markets in the run up to the PM’s self-imposed end-March target for triggering Article 50 and the beginning of divorce proceedings from Mainland Europe. Note that the latest UK Inflation report, also released on Tuesday, could further move Sterling as the impact of the devaluation in the Pound post-referendum continues to be felt in the UK economy (a great-than-expected uptick could result in a more hawkish Bank of England in a fortnight).
As a result of the key nature of the PM’s speech in relation to global trade, the performance of Pound Sterling is likely to dictate FX markets throughout the vast majority of the week.
With that said, Donald Trump’s inauguration on Friday, whilst likely to be highly scripted and well-rehearsed, does pose a risk to the US Dollar. Markets reacted tepidly to the President-elect’s first press conference after his election last week as he failed to divulge details surrounding his economic plans for the US while in office in a lively Trump Tower showing. In particular, no mention of the massive fiscal stimulus that was a major policy headline on the campaign trail and indeed his acceptance speech saw the Dollar sharply negative in the aftermath. Any further brushing over of key policies could provoke a similar reaction in currency markets. USD bulls, however, will be hoping that the newly inaugurated Trump will confirm his expansionary plans for the US economy.
Overshadowed by aforementioned political events on both sides of the Atlantic, the European Central Bank’s latest monetary policy update on Thursday will likely provide the greatest impact on the Euro this week. Last time out, President Mario Draghi and his fellow rate setters at the ECB opted to extend the bank’s immense bond-buying progamme for another sixth months, albeit with a lower limit on purchases. The tapering-but-not-tapering of QE initially saw a negative reaction in FX markets, however has since seen the Euro outperform both GBP and USD in recent weeks.
While no further action is expected to be undertaken at Thursday’s meeting, Wednesday’s Eurozone CPI is likely to provide the key talking point, as Draghi et al. strive to move the Eurozone comprehensively from the long period of stagnation in the EU that has blighted its economic recovery since 2008. Could December’s move mark a turning point for the Economic area’s fortunes?
Key data this week (Sign up here to get our daily live macro-calendar)
UK Economic Announcements
00:01 Rightmove House Prices
US Markets closed for Martin Luther King Day
Intl Economic Announcements
04:30 Tertiary Industry Index (JP)
10:00 Trade Balance (EZ)
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UK Economic Announcements
N/A PM Theresa May speaks on Brexit
09:30 CPI, RPI, PPI, HPI
Intl Economic Announcements
04:30 Industrial Production (JP)
10:00 ZEW Surveys (DE & DE)
13:30 Empire Manufacturing (US)
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UK Economic Announcements
09:30 Unemployment & Earnings
Intl Economic Announcements
07:00 CPI (DE)
10:00 CPI, Construction output (EZ)
13:30 CPI, Average Weekly Earnings (US)
14:15 Industrial & Manufacturing Production (US)
15:00 NAHB Housing Market Index (US)
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UK Economic Announcements
00:01 RICS House Price Balance
Intl Economic Announcements
12:45 ECB Monetary Policy Update
13:30 Housing Starts & Building Permits, Philly Fed (US)
16:00 Crude Oil Inventories (US)
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UK Economic Announcements
09:30 Retail Sales
Intl Economic Announcements
02:00 GDP, Industrial Production, Retail Sales (CN)
07:00 Producer Prices (DE)
17:00 Inauguration of President Donald Trump
18:00 Baker Hughes Rig Count (US)
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