During the European trading session tomorrow, the market will be focusing on two key events from the UK and the US. These events could drive currency moves on a fundamental level.
From the UK, we’ll be looking into the economy’s ability to continue to produce given all the political difficulties. And from the US, we have the concern that economic growth and job creation might be causing inflationary pressures. So we need to keep an eye on core CPI to see if or when the Fed will get back to their rate raising habit.
UK Manufacturing Production
The UK gives us a deluge of data at 10:30 CET (4:30 EST) including trade balance and industrial, construction and manufacturing production. Typically we could see some moves in the GBP pairs around this data, because both the trade balance and manufacturing production are market movers. And they can contradict each other in terms of their market interpretation.
Manufacturing production is expected to return to 0.0% on a monthly basis. This would be down from the 0.7% increase registered prior. The monthly value tends to fluctuate more, but even so, its trend has been on the negative side for close to two quarters.
Manufacturing production on an annualized basis tends to be more stable. It gets more market attention and has been showing more depressing signs. It’s come in negative four months in a row, but current expectations are for a slight improvement to -0.7%. The last time manufacturing production was negative was in mid-2016.
UK Trade Balance
The market is also going to be looking at the trade deficit. The deficit has been widening consistently since September last year. However, this is largely being attributed to companies stocking up on supplies ahead of Brexit fears, pushing imports higher than exports. The consensus among surveyed economists is for the trade deficit to make its first pullback to -£3.6B from the -£5.0B prior.
The two numbers are linked because what’s depressing the trade balance is a drop in exports of manufactured goods. And this is leading to pressure on the UK industrial sector. A combined miss in both of these numbers could be quite negative for the GBP. And the currency is already quite nervous around the neverending jitters of Brexit reports. In fact, PM May is set to have a series of meetings on the Continent tomorrow, hoping to get another extension.
Saving the most important for last, we have US CPI at 14:30 CET (or 08:30 EST). The market is focusing on the core number since that’s the one that the Fed follows. Expectations are for it to tick up to 0.2% compared to 0.1% prior. However, this would pull the annualized rate down to 1.8%, and below the Fed’s target. This will then consolidate the expectation that the central bank will keep a hold on future rate hikes.
The core CPI rate excludes food and energy. For the full CPI, we have an expectation of a monthly slip to 0.1% from 0.2% prior. This will reflect that prices of food have been declining since they are offsetting the increasing cost of energy. Food accounts for around 19% of the average American’s budget. This implies that even as real wages remain largely stagnant, Americans have more disposable income for non-food items.
We could expect something of a muted reaction in the markets if there is a beat or miss on the CPI data. This is mostly because a lot of focus will be on the FOMC minutes to be released later in the day.