Rate Hike moves from Certain to Probable
Morning mid-market rates – The majors
April 13th: Highlights
- Next week’s inflation data critical
- Euro reacts to “old news” on trade
- Dollar rallies as risk aversion falls.
Inflation and Employment data to provide confirmation.
Since there are clear opposites to those positives; the reality of Brexit and life outside the single market and what happens post any rate hike, it is most likely that sentiment that has been the single most important contributor to the rally. Over the past week, the economic data coming from the UK has been a little weak, not sufficient to derail talk of a rate hike but certainly sufficient to raise doubts.
The interest rate futures markets are now predicting a 66% chance of a hike, down from 70%. One positive piece of data this week was the 2.7% rise in house prices, but this has been overshadowed by the continued decline in the number of properties sold which is arguably the more important statistic.
The pound finally managed to break and hold above the 1.1500 level versus the single currency reaching a high of 1.1567 before closing at 1.1543. Against the dollar, Sterling is still struggling to break through stubborn resistance at 1.4240 despite several attempts.
A day of consolidation is likely as the market prepares for a highly significant week for the short/medium term direction of the currency.
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ECB minutes spook Euro
The Central Bank’s worries over the strength of the single currency could place in jeopardy plans to consider the removal of the Asset Purchase Scheme towards the end of the year. With inflation at 1.4%, any currency strength could see that fall to below 1%. Mario Draghi’s ongoing concern is to provide sufficient assistance to the weaker economies of the region to grow. So far, they have coped very well with the strengthening of the currency over the past eighteen months but a sustained rise to or above 1.3000 could be a bridge too far.
The Euro’s reaction came mainly against the pound while versus a weak dollar in remained in a relatively tight range. It reached a low of 1.2299, close to the bottom end of its recent range but didn’t come close to testing strong support around 1.2260.
Next week sees the release of pan-Eurozone inflation data with the MoM data expected to fall to 0.9% although YoY is expected to remain at 1.4%. That should prove to be “currency neutral” as the single currency remains reactive to other G7 currencies.
“Trump risk” still a factor.
The seeming move to a more considered approach lowered risk aversion a little and the dollar rallied, moving away from recent support levels. It reached a high of 89.96 before falling back a little to close at 89.78. It has remained close to its previous close overnight.
Next week there are some important data releases which may give traders a clue to what is happening in the U.S. economy and will remain as drivers of the currency once risk aversion returns to “normal”.
Retail sales and Industrial Production are the most noteworthy but there are also speeches by several members of the FOMC which may shed some light on how hawkish the committee is going to be going forward.
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.”