Good morning,

More talk taking USD higher

Further comments from the Federal Reserve on the likelihood of a rate rise at the central bank’s March meeting have continued to boost the USD overnight pushing EURUSD down to 1.05 and GBPUSD below the 1.23 level for the first time in 6 weeks.

Tuesday’s comments from Fed members Dudley and Williams on the case for higher interest rates becoming more “compelling” set this ball in motion and impetus was added by Fed member Brainard saying a rate increase will be appropriate soon. On Monday the markets had priced in a 33% chance of interest rates rising in March with that now sitting at 86% as of this morning.

The question we have to ask ourselves is what has changed?

Not much in our opinion. On the surface, the economic data and certainly the impact of fiscal tightening from the Trump administration hasn’t; we don’t foresee American households actually feeling the effects of any tax breaks and infrastructure spending for at least a year. So that means that we and the wider market have misread the pronouncements of the Federal Reserve and that they are more concerned about the impact and the stickiness of inflationary pressures.

This could also all be a dip of the toe in the policy waters to see whether the markets are open to rate rises now or whether there will be some form of tantrum; so far the reaction has been more towards the former.

Easily see Fed speak continuing to help USD

While no Fed speakers are due to take to the podium today we do have Fed member Powell speaking tomorrow ahead of Fed Chair and Vice Yellen and Fischer respectively. An endorsement of the March message from the latter too will only cause the market to take that 86% probability closer to 100% and boost the curve for further increases in borrowing costs later in the year.

Yesterday’s manufacturing ISM number for February showed strong growth within the sector but prices rising at their 2nd highest level since June 2011; the highest level was this January’s number.

Lords vote and manufacturing costs

A similar release was seen here in the UK although manufacturing growth slowed according to the latest PMI. The main takeaway from the release was that “input cost inflation eased from January’s record high, but remained among the fastest seen during the survey history. This fed through to the factory fate, with output charges alone rising at a rate close to January’s near series-record.” Some companies are seeing growth from the devalued pound, some are simply seeing their costs rise.

The UK construction PMI is due at 09.30 this morning with expectations set for a slight weather-related softening in output growth.

The UK House of Lords voted yesterday to amend UK PM Theresa May’s bill on Article 50 by 358 votes to 256 on the question on the government having to protect the rights of EU citizens here in the UK. The opposition stands on the basis that benefits are still to be paid to EU citizens and that British citizens within the EU have not yet be guaranteed.

Despite the vote on the amendment the government believes that the timetable for triggering Article 50 has not changed. The meeting of EU leaders starts a week today and that is where the triggering is likely to take place.

The pound had a fairly torrid day yesterday and that weakness looks set to continue.

Have a great day

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