Data fails to deter rate Expectations.
Morning mid-market rates – The majors
April 18th: Highlights
- Wage inflation turns positive for first time in a year
- Strong pound likely to dampen inflation
- Political unrest threatens euro.
Dollar supported by production data
Headline wage increases including bonuses rose by 2.8%, below the 3% that markets had been expecting. With CPI, which is released today, likely to be below that figure, consumers will see a positive effect on their pay checks but that will probably to be short lived as interest payments will rise on the back of any rate hike next month.
Versus the single currency, the pound also continued its recent rally making a high of 1.1600 although it also fell back a little to close at 1.1553.
It remains to be seen if the pound can rally again following today’s inflation data since the risk is for a deeper correction now, as inflation is unlikely to provide support given the strength of the pound. The chances of a rate hike as illustrated by interest rate futures markets increased yesterday following a recent fall on weak economic data.
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Global risk appetite rises.
With global risk appetite returning after a difficult month which culminated in the threat of a serious escalation between Russia and the U.S. the seeming withdrawal of any imminent threat has allowed financial markets to recover. Both sides remain alert to any move by the other but understand how carefully they need to tread.
Treasury Secretary Steve Mnuchin was at pains to confirm that the U.S. doesn’t intend to label either China or Russia a currency manipulator following his department’s review which was released this week. It is not the President’s style to wait for any review before opening up if he feels warranted, so for now, trade concerns remain behind closed doors. The dollar has been buffeted by outside influences recently and unless there is another flare-up min Syria it can now rely on domestic drivers.
Economic indicators provide dollar with welcome support
The jury is still out on the exact path of interest rates in 2018 with Fed Chair Jerome Powell remaining slightly sceptical over the source and path of inflation. He is sufficiently open minded to be able to react should the data continue to improve. The FOMC sees wage growth as the most likely source of inflation and with the 2.7% increase seen in March improving but not sufficiently strong to be conclusive, the next hike remains in the balance and may wait until Q3.
Concerns over the twin deficits will continue to worry markets. The amount of new debt that will have to be issued to fund ambitious infrastructure projects brings lingering worries particularly as relations with China, America’s largest creditor, remain less than colloquial.
It is hoped that the dollar can enter a more benign period for the rest of the month allowing it to recover the 90.00 handle and possible test the medium-term resistance close to 90.80.
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.”