Yesterday’s markets saw most currency pairs trade sideways but once again it was movements within oil markets that had traders in a frenzy. Brent crude prices fell by a full 5% again yesterday as it is affected evermore by a slowing of global growth expectations, a strong USD and a supply glut.
Chinese and European growth has been shown to remain weak through Q4 ’14 and into this year so far with the US economy seemingly the sole provider of encouraging economic news. This has obviously made the USD more attractive as an asset on interest rate expectations and has seen the value of ‘black gold’ fall. Throw in the continuation of current supply levels and any first year economic student will be able to tell you that oil prices are set to come lower.
The supply issues remain the most pernicious we would say at the moment. Overnight the Oil Minister of the UAE stated that OPEC countries will not cut production and that it should be other members of the oil producing fraternity to do so. He also stated that he believes that OPEC made the right decision in November by keeping the taps open and that no extraordinary meetings are planned between now and the next scheduled meeting in June.
Traders will be watching those oil producing currencies a lot more closely this morning, particularly the Russian ruble and the Mexican peso.
In structured economic data, the obvious highlight today will be the latest set of inflation readouts from the UK. As mentioned in yesterday’s sterling update, the announcement of CPI for December is expected to show year-on-year price growth at a miserly 0.7%; that would be the lowest number since June 2002.
While the markets are looking for a slip to 0.7%, I expect to see the ONS announce that inflation has fallen to 0.6%. This is lower than the consensus forecast, as we believe that while oil price movements have been correctly factored in, imported supply chain inflation and food price shocks give us cause for concern. Regardless of how low the number is, anything less than 1% will trigger a letter from Chancellor George Osborne to Governer Carney, explaining why inflation is so far away from target. Indeed, this will be the first letter for inflation under-shooting its target since the Bank of England became independent under the labour government in 1997.
Sterling is a little lower this morning in the run into the announcement but gained some strength from an opinion poll that showed the conservative party with a 6 point lead over the labour party. According to the poll commissioned by former vonservative donor Lord Ashcroft, the Tories lead with 34%, labour on 28%, UKIP on 16% and the liberal democrats on 8%. These numbers would still give us a hung parliament on May 8th however.
The CPI announcement is due at 09.30 GMT.
Elsewhere, chatter around a Greek exit from the eurozone continues. The new concern is that Greece could “stumble” out of the eurozone without intending to, should any new government elected at the January 25th elections fail to negotiate a deal with the country’s international creditors before the aid dries up on February 28th. Opinion polls continue to show that the Syriza party, intent on renegotiating Greece’s debt pile, have a slim but stable lead. Next week is make-or-break week for the euro with both the Greek election and the European Central Bank meeting.
