Macron Debates Well – EURUSD Pops 1.0800

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Market Drivers March 21, 2017
Euro clears 1.0800
UK CPI hotter, cable runs through 1.2450
Nikkei -0.34% Dax -0.04%
Oil $50/bbl
Gold $1231/oz.

Europe and Asia:
GBP UK CPI 2.3% vs. 2.1%

North America:
CAD Retail Sales 8:30

UK inflation data printed much hotter than anticipated pushing cable through the 1.2450 level in morning London trade while euro was boosted by strong performance of Emmanuel Macron in last night’s French Presidential debate as the single currency poked above the 1.0800 level for the first time since last year.

UK CPI printed at 2.3% versus 2.1% eyed while core reading rose to the key 2.0% level from 1.8% forecast. The core reading is now above the BoE’s target rate and was the real reason for the pound rally, as currency markets begin to price in the possibility of a rate hike.

Although Governor Carney and other members of the MPC have repeatedly stated that UK inflation is temporary phenomenon, the policy makers will find it increasingly difficult to ignore the inflationary pressures within the system if the data continues to rise over the next few months.

The UK economy finds itself in an unenviable position of seeing higher prices amidst stagnant wages which is likely to dampen consumer demand going forward. It’s is understandable why under such conditions the MPC may be reluctant to hike rates. However, with UK benchmark rates at only 25 basis points the central bank must do something in order to keep inflation in check. A rate hike sooner rather than later could boost pound and act as a natural cap on any inflationary pressure. The single currency remained bid post news and could make a run for the 1.2500 figure as the da proceeds.

Meanwhile on the continent the highly anticipated French Presidential debate went on for more than 3 1/2 hours, but none of the rivals was able to knock off Emmanuel Macron who emerged post debate with the highest approval ratings. Still the populist candidate Marie Le Pen retains her fiercely loyal base and it now look increasingly clear that this will be a runoff race between Mr. Macron and Ms. Le Pen. Although Macron leads by more than 20% in a head to head comparison, the markets remain highly wary of the polls given their massive failure to predict outcomes in 2016.

The news tonight, however, was powerful enough to boost EUR/USD and propel the unit through the 1.0800 level, but it has stalled at those levels for the time being and any further progress will depend on dollar weakness as the day progresses.

Boris Schlossberg
Managing Director

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