Good morning,
It gives and it taketh away
Once again, London is walking into a quiet market following a rather sombre Asian session. Dollar gains that had been seen in the past 24hrs following comments from Fed President Harker about a possible rate rise in March have melted away after another Fed President told reporters that the Federal Reserve did not want to surprise markets. Swaps and other predictive markets are only pricing in a 40% chance of an increase in borrowing costs next month and so any move to hike rates would be seen as a surprise.
The minutes of this month’s Federal Reserve meeting are due later today and will likely follow the broad thinking and tone of Fed Chair Janet Yellen’s recent testimonies to members of Congress. While there may be chatter of a March rate hike we see markets dampening that down.
Still waiting on one campaign promise
The US dollar is strengthening despite further political issues stemming from the Trump administration’s decision to tighten controls on immigration and those in the country illegally. While this may generate a vast swathe of column inches within the media, the impact on investment markets is rather more subtle.
Simply put, Trump is fulfilling his campaign promises. The four main pillars of his campaign focused on ‘the wall’, a repeal of Obamacare, a shutdown of Muslim immigration and taking on China on trade. So far he has made moves to begin the first three with little progress with the fourth. Some could say this is being worked on behind the scenes but there are no ‘behind the scenes’ in a reality show.
When Trump’s administration starts to focus on trade then the worm may start to turn for both the US dollar and resurgent emerging market currencies.
Euro risk costs increasing
The main mover has once again been the euro with GBPEUR getting closer and closer to our target of 1.20 and EURUSD eyeing up prices below the 1.05 level. This is despite a stronger run of European PMIs from German, French and Eurozone manufacturing and services sectors. The pressure on French bond yields makes the obvious connection with fears over the Presidential election. Costs of hedging downside risk for the single currency have risen to the highest level so far this year and that will continue to correlate with a lower spot price.
The Day Ahead
The highlight for sterling today is the 2nd reading of UK GDP for Q4. Given the lack of strength seen in UK consumption numbers so far in 2017, any growth momentum is going to be important to output for the first quarter of this year. However, regardless of what this morning’s reading shows – and an upgrade is likely – we know that the more recent data has shown a substantial softening and therefore we think that GBP will remain a little unloved.
Comments from Mark Carney yesterday around forward guidance being or not being neutral at the moment did little to drive sterling with most instead focusing on the admission from the BOE’s Chief Economist that the Bank would not be able to predict the next recession.
UK GDP numbers are due at 09.30.
Have a great day