FTSE higher pound lower ahead of UK GDP and US Inflation

With the tech selloff still underway and high impacting data releases both in the UK and the US, trading could remain volatile right up to the close for the long Easter weekend.

Trading overnight saw investors continue to rotate out of tech stocks, which have long been Wall Street’s darlings, into safer government bonds. Whilst the Dow managed to close flat, the S&P and the Nasdaq were dragged down by the continued tech selloff end 0.2% and 1% lower. The FTSE has since started higher.

After a relatively light economic calendar for the majority of the week, today could prove to be the most exciting day data wise.

UK GDP – no miracles expected

Expectation are for GDP to be 0.4% quarter on quarter and 1.4% on an annualized basis. Drawing comparisons with the US, which experienced economic growth of 2.9% and Germany at 2.2%, the hard-hitting impact Brexit is exposed.

Traders won’t be holding their breath for an impressive read here and no miracles are exected. Business investment remains weak thanks to Brexit uncertainties, and consumers were under intense pressure in the final quarter of last year.

Inflation was running at 3%, whilst wage growth was low at around 2.2% meaning a wage cut in real terms. Not the makings for strong economic growth.

GBP/USD fell steadily across the previous session following the robust US GDP reading. A weaker than forecast UK GDP print could see the pair continue to fall towards strong support at $1.40. The weaker pound could also offer support to the FTSE.

US PCE – Is the inflation story finally picking up?

Inflation ha been an issue at the Fed for most of the previous year. Despite strong economic growth, inflation has remained frustratingly stagnate, failing to exert any pressure on the Fed to hike rates. 

Some Fed policy makers have ear marked the lacklustre inflation levels as a reason to ease back on tightening monetary policy. However, given the two recent hikes these calls are currently being ignored.

Core PCE, the Fed’s preferred measure of inflation, is expected to edge slightly higher to 1.6% in February, up from 1.5% in January. 

However, there is growing doubt as to whether this will actually be achieved given the three months of declines in retail sales, core CPI remaining constant and personal spending and personal income also expected to remain constant.

As we pointed out, so far the Fed has continued to tighten policy as the economy strengthened, regardless that inflation remains below 2% target. 

However, will continued anaemic inflation encourage the Fed to take its foot off the gas as far as tightening is concerned in 2018?

The market is pricing in 78.8% probability of a hike in June. A strong reading could boost this closer to a certainty, simultaneously boosting the dollar. 

However, a weak PCE read of 1.5% could pull the dollar lower, raising doubts over a hike in June.