European FX Outlook: Volatility is back up as equities fall steeply

What you need to know before markets open:

• The Bank of England has left the Bank rate unchanged, but sent a hawkish signal to the market as it lowered the inflation forecast in its February Inflation Report and said it might need to increase the Bank rate sooner and faster than originally estimates in November Inflation Report.
• The global sell-off in equities continued on Thursday and early on Friday stocks with markets from the US to Asia declines 10% from their January highs.
• The UK manufacturing report headlines the day in Europe.

Friday’s market moving events

• China’s CPI remained unchanged at 1.5% y/y in January.
• French industrial production is set to rise 0.1% m/m in December.
• Italian industrial production is expected to increase by 0.8% m/m in December.
• The UK manufacturing output is expected to increase 0.3% m/m in December, decelerating to 1.9% over the year.
• The UK industrial output is set to fall -0.9% m/m in December decelerating to 0.3% y/y.
• The UK trade balance is set to reach a deficit of £-11.6 billion in December.
• Canada’s employment rate is expected to rise 10K in January with unemployment ticking up to 5.8%.
• The US wholesale inventories are set to rise 0.6% m/m in December.
• The Bank of England MPC member John Cunliffe is scheduled to speak at the Asset Management Derivatives Forum, in California at 16:45 GMT.

Major forex market movers

• GBP rose steeply backed by the hawkish turn of the Bank of England but sold off as the equities slump supported the US Dollar.
• With the global sell-off in equities gaining traction again going into the weekend, the currencies like US Dollar and Japanese Yen representing traditional safe havens are set to benefit.
• Watch GBP as a factor of the UK manufacturing output report.

Thursday’s macro summary

• China’s trade balance unexpectedly halved its surplus to $20.4billion in US Dollar terms with imports rising 36.9% while exports rose 11.1% y/y.
• German trade balance reached a surplus of €21.4 billion in December with exports rising 6.3% y/y and import up 8.3% y/y. The trade surplus for the whole year of 2017 reached €244.9 billion compared to an all-time high of €248.9 billion in 2016.
• German Bundesbank President Jens Weidmann said that recent appreciation of Euro seems unlikely to jeopardize the economic expansion of the Eurozone. With inflation being subdued, the accommodative stance of ECB monetary policy remains appropriate with asset purchases beyond current end-date rather unlikely.
• The RBA Governor Philip Lowe is scheduled to speak at the A50 Australian Economic Forum, in Sydney at 9:00 GMT.
• Dallas Federal Reserve President Robert Kaplan said the US central bank is likely to continue removing policy accommodation gradually and could hike rates three times this year.
• The Bank of England quarterly Inflation Report lowered the near-term inflation forecast while saying it might have to hike rates sooner and faster than originally estimated back in November last year. The hawkish tone of the Inflation report and the Bank of England Monetary Policy Committee meeting Minutes caught markets by surprise with Sterling surging.
• Canadian housing starts rose 216K in January.
• The US weekly initial jobless claims rose less than expected by 221K in the week ending February 2.
• Kansas City Federal Reserve President Esther George said it is important to maintain monetary policy tightening in the environment of loose fiscal policy.
• Canadian building permits are seen rising 2.0% m/m in December.
• The Bank of Canada Deputy Governor Carolyn Wilkins was speaking of innovation at the growth Symposium, in Quebec.
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