The UK Economy's Bright Spot

The UK's labour market remains strong but the pound slides as Brexit concerns weigh ahead of today's busy calendar.

Previous Day's Market Highlights

Sterling slid on Tuesday despite employment data once again proving that the labour market remains one of the few bright spots in the UK economy at present. Figures were released broadly in line with forecasts, showing wages (inc. bonuses) continuing to increase at a post-crisis high of 3.5% on a 3-months-on-year basis and the unemployment rate holding steady at a 4-decade low of 3.9%. Furthermore, the employment rate reached 76.1%, the joint highest on record, while real wages increased at their highest level since September 2016 - though this is partly due to a fall in inflation. Although the labour market remains tight, the data is unlikely to alter the Bank of England’s policy stance as inflationary pressures seem muted along with the continued Brexit-linked uncertainty. On the subject of Brexit, reports of stalled cross-party talks, along with no sign of an agreement on a customs union, weighed on sterling. Over the course of the day, the pound lost around 0.4% against both the dollar and the euro, though remained confined to familiar ranges. 
Elsewhere, the euro modestly lost ground, declining for the first day in three despite upbeat data from Germany. Economic sentiment, as reported by ZEW, reached its highest level since March 2018, tipping into positive territory with the index reading 3.1. The downward pressure on the single currency was largely caused by reports that several ECB policymakers doubt projections that growth will rebound in the second half of the year. The single currency lost just over 0.1% over the day. In contrast, the dollar advanced, adding 0.15% against a basket of peers despite worse than expected industrial production data.
Overnight, the Kiwi dollar has fallen by 0.6% after poorer than expected CPI inflation figures have increased the chances of a rate cut from the RBNZ. CPI was recorded at just 1.5% (y/y) in the first quarter, well below expectations of 1.7% and the RBNZ’s 2% inflation target. The RBNZ’s May policy meeting is now very much live, with OIS markets now assigning a 56% chance of a 25bps cut, almost double the chances at the beginning of the week. Also released overnight was upbeat data from China, with 1st quarter GDP increasing at an above-forecast 6.4% and industrial production vastly beating expectations, increasing at 8.4% on a year-on-year basis in March. This Aussie dollar has been the main beneficiary of the upbeat data, rallying 0.5% due to the close trading relationship between the two countries.
In other markets, equities gained after another solid set of US earnings releases. In Europe, the Stoxx 600 added 0.4%, while the US benchmark S&P 500 added 0.1%, continuing to inch closer to its all-time high. Finally, oil prices took a pause for breath, with supply risks offsetting rising US stockpiles. Both Brent and WTI traded largely flat, the latter adding just under 0.2%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1545 1.1787 1.1463 2.75%
GBP/USD 1.3055 1.3269 1.2976 2.21%
EUR/USD 1.1305 1.1391 1.1183 1.83%
GBP/AUD 1.8147 1.8731 1.8110 3.32%
GBP/NZD 1.9370 1.9562 1.8960 3.08%
GBP/CAD 1.7402 1.7795 1.7327 2.63%

Today's Market Highlights

The economic calendar is once again busy today with the main focus for sterling set to be this morning’s inflation release. Expectations are for CPI to have increased at 2.0% on a year-on-year basis in March, a slight uptick from the previous figure and in line with the BoE’s inflation target. A positive release would likely see the pound find some near-term support, though is unlikely to be enough to see sterling breakout of its recent ranges with the market continuing to wait for news from Westminster. The release is also unlikely to effect the BoE’s outlook, with the Bank likely on hold until the UK leaves the EU. 
Elsewhere, inflation numbers will also be the order of the day in the eurozone, with final CPI for March due. Markets are not expecting any change from the previous ‘flash’ estimate, with CPI at 1.4% and core CPI increasing at just 0.8%. Such sluggish inflation may weigh on the euro and is may cause further concerns over the ECB’s ability to stimulate the economy in light of Draghi & Co.’s limited policy arsenal. Trade balance and current account figures will also be released, though these are typically of little interest for markets. 
The afternoon session is also busy, with focus falling on inflation figures from Canada. Given the rather downbeat business survey earlier this week, markets seem relatively pessimistic about the release, expecting core inflation of just 1.3% on a year-on-year basis. While headline inflation is set to return near the BoC’s target, recovering to 1.9%, this is largely due to a resurgence in oil and energy prices, hence the lacklustre core figure is of more concern and is likely to keep the BoC on hold for now. A below forecast release could weigh on the loonie, especially if the prospects of monetary policy tightening become slimmer. Also released will be trade balance figures from both Canada and the US, though neither typically has a significant market impact. 
The central bank speakers calendar is also busy, with the main highlight set to be this afternoon’s speech from BoE Governor Carney. Markets will be looking for any guidance on future monetary policy changes and for comments regarding the UK’s divorce from the EU. Also due are the ECB’s Lautenschlager and dovish Fed member Bullard.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP CPI (y/y - March) 2.0% 1.9%
10:00am EUR Final CPI (y/y - March) 1.4% 1.4%
10:00am EUR Final Core CPI (y/y - March) 0.8% 0.8%
1:30pm USD Trade Balance -53.7bln -51.1bln
1:30pm CAD CPI (y/y - March) 1.9% 1.5%
1:30pm CAD BoC Core CPI (y/y - March) 1.3% 1.5%