Good morning,

USD: Little storm in a big tea cup

Despite the headlines on global news bulletins, currency markets are yet to really react in a similar fashion. The biggest movers on my monitors have been currencies that rely on oil price growth to fund exports – Canada, Mexico, Norway, and Russia – following a slip in oil prices yesterday.

Dollar has lost ground against the yen as investors pile into the safety of the Japanese currency, for the most part the dollar is higher across the board against other members of the G10. GBPUSD is back below the 1.40 level; a combination of poor GBP data and a snapback of the US dollar from oversold levels.

Whether these sell-offs continue is dependent on whether investors believe that the changes in the inflation picture in the US will further unbalance expectations of when the Federal Reserve can raise interest rates. There will be further horror stories from this sell off however; when any ship sinks it takes a while for the bodies to float to the surface.

GBP: Sterling taken down by poor services sentiment

Sterling was on the back foot from the get-go as January’s services PMI number was the worst since September 2016 and highlights a divergence in confidence in the UK economy with consumers looking down in the mouth while businesses look optimistic. The services sector has echoed concerns in the manufacturing sector about increases in input costs and we expect the sector to attempt to maintain margins and pass these on to consumers; it will take a few months to work out whether this is beginning of another inflationary impulse for the UK economy as a whole and therefore something that the Bank of England will need to counter with additional interest rate rises in 2018.

For now, the UK consumer remains the key driver of the UK economy and business optimism can lift consumers’ spirits should businesses continue to drive the jobs market onwards.

Brexit headlines are back to their ideological best/worst, this time on the Customs Union and the negotiation stance of Theresa May. The Irish border issue is also back in the headlines given the ‘agreement’ around the lack of a hard border between the UK and the Irish Republic.

EUR: Wage deal creates further inflation talk

The German union IG Metall and employers agreed on a 4.3% wage increase over 27 months for the region of Baden-Wuerttemberg. We noted last week that should the union manage to negotiate a deal for its employees then we would expect other German workers to begin similar discussions with their employers and drive inflation in the country.

It is safe to say that this will lead to a divergence between Germany and the rest of the Eurozone and a balancing act for the European Central Bank.

The euro has held up relatively well; these movements are in stock markets not in the sovereign debt markets that have rattled the continent in the past.

Have a great day