Good morning,

USD: Fed pitches for a pause

It feels strange not starting this update off with a treatise on the state of Brexit but yesterday the Federal Reserve was the greatest influence on things. The press conference following the decision to hold rates as they are saw the central bank shift to a patient outlook on further interest rate hikes, a decision that sent the USD lower overnight.

Within the statement there were three key changes that prompted markets to further price in a pause in the Federal Reserve’s plan for higher rates. The most important was a note that the central bank may slow the pace of its project to unwind the stimulus pumped into the economy via its quantitative easing program.

The language of the statement was not downbeat but emphasised that the US economy and the wider global picture both must improve before interest rates rise again. As of this morning, interest rate expectation curves are pricing no change in the Fed Funds Rate this year. Some banks entered the year expecting a full four more hikes so there is a lot of expectation repricing taking place and a weaker dollar as a result.

We now must try and look through the political noise that the arrests of confidantes to President Trump might throw up and focus on the data as green shoots can quickly turn the market’s view of this new-found patience into something akin to laziness. The dollar would not remain weak in such circumstances.

EUR: ECB watching Fed weakness closely

Yesterday was set up for another negative day for the euro as weak inflation data from Germany showed once again that while the Eurozone is able to create higher wage pressures, higher inflation is just not coming with it. This further dents the European Central Bank’s plans to embark on the first increase in interest rates in the region since 2011.

Of course, the fact that the Federal Reserve is now getting cold feet has its impacts on the ECB as well. EURUSD is back above 1.15 this morning with further euro strength only likely to push inflation even lower. The ECB and its members are nowhere close to intervening verbally on the currency yet – we would be watching out for it if we saw a move towards the 1.18 mark in EURUSD – so a higher euro will not be cheered by all and sundry.

Unemployment and growth numbers from Italy, Germany and the wider Eurozone are all due this morning with no great surprises expected. The picture was poor in Q4, any suggestion otherwise could lead to euro strength.

AUD: Chinese sentiment pushed AUD ever higher

The renaissance of the Aussie dollar continues for the fourth day in the row following positive news from the Chinese economy overnight. Both the manufacturing and services PMIs for the world’s second largest economy beat low estimates to show a rebound from a weak January. It is too early to tell whether this recovery can become entrenched – trade talks in Washington between China and the US offered little yesterday – but signs that the worst may be over will keep the yuan and other trade-focused currencies on the front foot.

Have a great day.