Sterling falls as data points to slow down
February 7th: Highlights
- MPC meeting to continue wage inflation hopes
- Flight to safety continues to drive dollar
- Euro back to familiar range
Reality suspended as rate hopes support Sterling
Traders have been clinging to the idea of a rate hike in May as a reason to retain long Sterling positions in the face of the biggest fall for the pound in eight months. While the justification of a single hike last November was tenuous at best particularly since it was a one-off, the clear slowdown in the UK economy, further evidenced by the fall in services activity data released on Monday makes hiking rates again almost impossible to comprehend.
Carney has cited a pickup in wage inflation that he believes can grow further through the year as a reason for optimism. Wage inflation may have come from an improvement in productivity, since actual activity remains weak. With construction and services activity falling, the data for manufacturing will be eagerly anticipated. It is expected that manufacturing and industrial production activity will have fallen significantly in January as Brexit fears continue to curtail business investment.
The pound continues to react to the global equity market falls. It reached a low of 1.3836 versus a strengthening dollar but was virtually unchanged following a turbulent day versus the single currency closing at 1.1275.
Dollar rally continues as equities bounce
The dollar index continues to recover from multi-year lows reaching 90.00 before edging back to close virtually unchanged from Monday at 89.67. The falls in equity markets that have now pervaded all the major exchanges will ease as buyers return following the shake out. While the FOMC remains on a three-hike strategy for 2018 with Jerome Powell advocating the gradual return of normal monetary policy, the path for the dollar will be determined by actual information rather than speculation driven by a single piece of data.
President Trump has been strangely quiet over the fall in equity markets. While prepared to take credit for “eighty-five new record highs since his election”, the correction, as his nominee takes over at the Fed, seems beyond his purview.
Euro in familiar range as market awaits data
Mario Draghi continues to be concerned over the effect of a significantly stronger currency on economic activity going forward he will use today’s non-monetary policy meeting of the ECB to counsel caution amongst his colleagues. Traders actions are driven as much by expectation as they are by actual data which is often “looking in the rear-view mirror at what has already taken place”, so the likely withdrawal of additional assistance could see a test of recent highs.
They will see DSr. Draghi as unable to hold back the tide of rising economic activity which will lead to higher inflation indefinitely. Something is going to give but higher rates and the withdrawal of the Asset Purchase Scheme will drive the currency higher with a consequential dampening effect on activity, which may be welcome in Germany but could be disastrous in Greece.
The Euro is back in the 1.23’s where it seems to have a neutral bias. It closed yesterday at 1.2371 having fallen as low as 1.2313, close to support at 1.2295.
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.”