Daily Market Brief 20 February 2018

Wage Data Key to Sterling Direction

February 20th: Highlights

  • Rate hike depends on income growth
  • Bearish factors lining up for dollar
  • Euro in reactive mode with Italian election looming

Sterling below 1.4000 despite rate expectations

The pound fell below 1.4000 versus a steadying dollar yesterday as wage data that will be released tomorrow is being seen as pivotal to the markets expectation of a rate hike as soon as May. When comparing the comments made by BoE Governor Mark Carney last November with what he said following the most recent MPC meeting it is hard to know what was expected from inflation in the intervening months. It remains around 3% and it will take far more drastic action to bring it substantially lower in the current environment.

Steling reached a low of 1.3958 versus the dollar yesterday and has remained weak overnight.

It is unlikely that a twenty-five-basis point hike in interest rates would have had a major effect on inflation and certainly not in such a short time period. Carney’s comments following the rate hike were decidedly dovish whereas, he turned hawkish more recently.

There have been successive comments from other MPC members (most notably from renowned dove Gertjan Vlieghe) regarding an upturn in wages growth and the need for higher rates to control the inflationary effect.

With real wage growth still well into negative territory, the Bank of England needs to be extremely careful not to choke off the tiny amount of growth being seen in the economy as Brexit uncertainty continues.

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Dollar Index rises from lows

The dollar index continued its marginal recovery as the market lacked the impetus to take it to fresh multi-year lows. Despite the headwinds facing the U.S. economy from the combination of tax cuts and increased public spending, traders are prepared to face that issue when it becomes clearer.

The dollar has been underperforming this year based on the game of “catch-up” likely to be played by other G7 central banks as the global economy starts to grow. There are, however, localized issues particularly in the Eurozone and UK that will either require the European Central Bank and Bank to England to either keep rates low or possibly reverse increases already made.

As the U.S. trade deficit rises to its highest level in a decade, the words of Treasury Secretary Steve Mnuchin in Davos (which were quickly contradicted by the President) ring in the ears of the market. A weaker dollar will provide a more competitive outlook for U.S. exporters although any systemic or long-term fall could harm the relationship with holders of Government debt, particularly China and Japan.

The dollar index broke through resistance at 89.10 and now looks set, on a technical basis, to test 89.80.

Euro remains on the sidelines.

The single currency was in a very tight range yesterday, hemmed in by buying interest at, and just below, 1.2380 and sellers lined up between 1.2440 and 1.2460. The fall from the recent high of 1.2510 will have brought some relief to the ECB who are concerned over the continued strength of the Euro and the effect it will have on the competitiveness of Eurozone exports.

Following on from the political dramas that the region faced in 2017, with elections in The Netherlands, France and Germany, the slate this year is lighter but no less interesting. The General Election in Italy takes place a week from Sunday and the complex nature of Italian Politics means that a coalition is certain.

This brings concerns of its own since there will be a period of “horse-trading” once the votes have been counted as minority parties vie for their voices to be heard. One of the larger of the minority parties and one that will be likely involved in Government is the Northern League who are standing on a “right-wing Italy-first” platform. They vow to stand up to Brussels over immigration and threaten mass deportations of immigrants although where they will be deported to hasn’t yet been discussed.

It is the nature of the market that currencies fall in and out of fashion very quickly and it is likely that the single currency will be back in vogue sooner rather than later.

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.”