The week started with risk sentiment on a firmer footing than much of last week, gains were seen across major global indices and in the currency world the USD dropped back from 4 week highs. Data was generally light through the session and markets focused on some comments from BOE members although there was little impact on GBP. Stateside and the Trump administration unveiled their budget, the $4.4 trillion proposal would see considerable cuts to entitlements and an increase in spending on defense and immigration enforcement. However the big takeaway point was the impact the budget would have on the US deficit, pushing it above $1 trillion by the end of 2019, or above 5% of GDP. For the US economy this is more than double the historical average and the largest deficit for an economy in full employment since World War II. Needless to say, there was immediate pushback on the sustainability for such plans. Overnight sentiment has been mixed, the Nikkei traded lower as the yen rallied considerably vs the USD, USDJPY is down over 1% thus far today and dropping below 108.00 for the first time since last September. European stocks are turning red as I type, with US futures now looking lower as well.
The general sounding theme from a couple of the BOE speakers was certainly hawkish and in line with last weeks BOE statement and Carney’s Q&A. The BOE’s McCafferty was talking on a radio show yesterday evening and he highlighted the BOE willingness to raise rates if, indicating that rates would need to be raised faster than expected. Although he didn’t have a bias himself he saw the BOE continuing to be reactionary to markets and rates could rise or fall before they begin the unwind QE. The BOE’s Vlieghe was also on the wires stating that even with 3 rate hikes there would still be excess demand in the economy. The pound however was mixed on the day. Slightly firmer against a weaker USD, but weaker vs the euro. Today attention will be on CPI inflation data, markets will be looking to see a continued slowing in UK inflation. Expectations are for a drop back to 2.9% from 3%, with the reading for Jan expected to be deflationary at -.6%. One eye will be on the core reading however, expected to rise to 2.6% from 2.5%. This will set GBP direction for the day, while the bigger Brexit picture plays out. EURGBP at the top end of its range currently, we have seen euro sellers above .8900 up to.8930, so that top level is firmer support. A break above there will target a pop higher where .8970 to .9030 is the real bull line for EURGBP. 1.3765 provides support in GBPUSD, while any rally towards 1.4000 area will be the first area sellers get interested.
There is really not much in terms major data for the rest of the day. Details on the US budget will be watched more around the democrat kickback, Brexit headlines etc but overall markets will still be focused on the broader risk environment. There is still concern out there that last week’s action is just the beginning of a larger correction and markets certainly don’t feel like the selling is over just yet.