Daily Market Brief 5 February 2018

Sterling lower as market awaits BoE

February 5th: Highlights

  • MPC meeting to confirm Carneys upbeat tone
  • Dollar rallies after fastest wage growth in nine years
  • German coalition talks fail to provide solution

Rate talks defies poor data

There are several commentators and analysts who believe that a rate hike as soon as May is a real possibility in the UK following BoE Governor Mark Carney’s upbeat message in his testimony before Members of Parliament last week.

The pound retained its positive tone rising by 1.5% last week versus a dollar which started to claw its way away from multi-year lows. It did, however, close lower on Friday at 1.4122 and 1.1332.

Traders will await this week’s meeting of the Bank of England’s Monetary Policy Committee which is being held on Thursday and will coincide with the release of the Bank’s Quarterly Inflation Report. Whilst the consensus is for a 9-0 vote in favour of no change in official interest rates, there is a possibility that one or two of the “perennial hawks” may start to pressure for a hike.

The rate hike optimism is borne of comments from Governor Carney that wage growth is starting to pick up. This would provide a boost to consumer confidence and retail sales by narrowing the gap between incomes and prices.

Data, however, doesn’t add to the view of a rate hike in May. Construction data released on Friday came close to a contraction, although the lack of Brexit news did provide a little support to the currency.

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Employment report gives dollar a lift

The dollar rose from the ashes of the confusion over official policy on Friday as an upbeat jobs report provided hawks with some added justification that the FOMC will hike rates three times this year with the first hike coming as soon as next month.

The U.S. economy has been growing steadily if not spectacularly recently, but the dollar has been held back first by the seeming disagreement between the White House and the Treasury over the future path for the dollar. It has also suffered as the market tries to second guess what type of Fed. Chair Jerome Powell will make. It has been expected that he will be more reactive than his predecessor although the market will be able to see first-hand later today when he makes his first speech following his swearing in.

The dollar index rallied to close at 88.16 on Friday This was virtually unchanged on the week. The headline figure for news jobs created was 200k with a revision of 148k to 160k in the December data. The real “crowd pleaser” was the rise in the rate of wage increases which reached 2.9%, far stronger than both last month and the market’s expectation.

Euro facing potential political headwind.

So far in 2018, trade in the single currency has been heavily focussed on the economic growth that has started to move ahead rapidly within the Eurozone. While it is impressive that the overall economy is growing at close to trend, it should be remembered that the EU is still far more a political union than an economic one. The various economies of the Eurozone will never be fully integrated until there is fiscal as well and monetary union.

However, it is the politics of the region that are set to make headlines with the coalition talks in Germany failing to reach an agreement and the Italian election bringing concern to Brussels.

In Berlin, talks between Martin Schultz. Leader of the second largest Party in the Bundestag and Chancellor Angela Merkel failed to find a solution to the growing constitutional problem despite their self-imposed deadline expiring yesterday. It is beginning to look more and more like there will be another election in Germany unless one side shifts it position radically.

In Italy there are continued rallies in favour of leaving the single currency, fanned by the current front runner in next month’s election who is standing on an anti-EU and anti-Euro platform.

This week’s events of note

A Holiday shortened week with no major data releases

  • UK: Sunday Papers – Likely to bring more Brexit woe to the Government
  • Eurozone: Purchasing Managers Surveys – Will continue the recent surge in Eurozone activity and provide a boost to the Euro
  • Eurozone: Retail Sales – A mixed bag likely despite the strong currency
  • U.S. : Purchasing Managers Surveys – A slight improvement in both manufacturing and services likely.

  • Australia: Rate decision – No Change expected due to inconsistent data. there is a possibility of a 7-2 vote with usual suspects voting hike

  • Eurozone: Non-monetary policy meeting – A chance to discuss future policy without the need for a press conference. Euro strength likely to be a major topic
  • New Zealand : Rate decision – No change likely

  • UK: Rate decision – No change likely although Carney may allude to future policy.

  • UK: Manufacturing and Industrial Production – More bad news expected with little or no growth seen,

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”