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Remember Brexit? The two-year long process of the UK leaving the EU? Well, after a period of relative radio silence, this week has seen the issue thrust back into the spotlight.
Already this morning, the chief negotiators on both sides have announced that they have reached a provisional agreement on a 21-month transition period in which the UK will be able to negotiate its own trade deals. The issue of the Northern Irish border, however, remains up in the air, and will likely receive a lot of attention heading into a key UK-EU summit taking place on Thursday and Friday.
Prime Minister Theresa May is to meet counterparts in Brussels to finalise the transition deal, as well as suggesting a suitable deal encompassing the Irish border that does not result in a hard border being built between the two countries.
The pound has started the week strongly, breaking out from falling highs resistance against the Euro. But Brexit is not the only event that could move Sterling this week.
On Tuesday, February UK Inflation will be released (9:30am), with headline CPI seen retreating marginally to 2.9%, a 6-month low, however still a way ahead of the Bank of England’s 2% target. Should the headline figure come in at 3% or above, it could push Sterling higher as traders factor in a higher long-term interest rate. A lower firgure may see some Sterling appetite disappear as a UK rate hike in May becomes less feasible.
On Wednesday, UK Unemployment and Wage data is also released (9:30am). The key for the release will be Average Earnings data, with a closing of the gap between Inflation (currently running hotter) and Earnings likely to help the BoE become more hawkish without fears of damaging the UK consumer’s wallet.
Finally, UK Retail Sales data will be released on Thursday (also at 9:30am). The key barometer of spending and therefore total consumption, the data is likely to show a month hampered by poor weather, as well as the hangover of a disappointing Christmas.
These three data sets will all be closely watched by the Bank of England, whose Monetary Policy Committee meet on Wednesday and Thursday, releasing their all-important update at 12:30pm on the second day.
While no policy change is expected without an accompanying press conference, the event will be closely scrutinised for any mention of a potential rate hike at their next meeting on 10 May. A ‘Super Thursday’ event, accompanied by the quarterly inflation report and press conference, the May meeting is expected to see the UK interest rate above 0.5% for the first time since the financial crisis.
Currently, the implied probability of a May hike – according to Gilt futures – is 62%. Should the BoE produce a more hawkish than expected update on Thursday, this could increase further to benefit the Pound.
The BoE’s meeting comes just a day after the US Federal Reserve’s monetary policy-setting FOMC meet (Wednesday; 7pm). It’s the first meeting to be overseen by new Fed Chair Jerome Powell, and is expected to result in a 0.25% interest rate hike.
Most importantly, however, will be the accompanying press conference. Currently, many traders are expected three rate hikes over the course of the year. Yet they may be forced to reconsider should Powell, still a relatively unknown entity as a former investment banker, note the possibility of four hikes over the next nine months. A four-hike scenario could see the dollar regain some ground on Sterling and the Euro after this week’s early Brexit rallies.
Key data this week (Sign up here to receive our daily live macro-calendar)
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UK Economic Announcements
09:30 Inflation
Intl Economic Announcements
10:00 ZEW Surveys (Germany)
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UK Economic Announcements
09:30 Unemployment, Wages, Borrowing
11:00 CBI Trends
Intl Economic Announcements
14:00 Existing Home Sales (USA)
18:00 Fed interest rate decision (USA)
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UK Economic Announcements
09:30 Retail Sales
12:00 Bank of England interest rate decision
Intl Economic Announcements
8-9am PMI Manufacturing & Services (Eurozone)
09:00 IFO Surveys (Germany)
13:00 House Prices (USA)
13:45 PMI Manufacturing & Services (USA)
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Intl Economic Announcements
12:30 Durable Goods (USA)
14:00 New Home Sales (USA)
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