Daily Market Brief 21 February 2018

Narrow Ranges dominate as market on Hold

February 21st: Highlights

  • Barrage of contradictory factors confuse traders
  • Sterling remains above crucial support
  • Euro correction likely to reach 1.2280.

Traders to concentrate on short term drivers.

The dollar index continued its recent rally yesterday climbing to test resistance at 89.80 and has remained close to its highs overnight. The major currencies each has several conflicting factors both long and short term and as is usual it is the time factor than tends to dominate.

The concerns over the U.S. budget deficit ballooning to over one trillion dollars has been placed on the back burner as today’s FOMC minutes are providing hope of further clarity on future interest rate hikes. I think there may be a degree of disappointment since this was the meeting where the handover between Janet Yellen and Jerome Powell took place so it’s doubtful that either would have been making policy statements.

The dollar index is now at the limit of what can be considered a correction and a significant break possibly testing 90.20 could herald a stronger recovery. The market is already starting to consider the February non-farm payroll data but will have to wait a week as it is not due for release until 9th March. The January report was the catalyst for a dollar rally which seems a long time ago now and a continuation of strong wage growth will be needed to encourage the Feds three hike strategy for 2018.

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Sterling steady versus dollar, rallying versus Euro.

The continuing rally for Sterling versus the Euro has two reasonably simple explanations. First, since the single currency makes up 57% of the dollar index it is more commonly used as a proxy for a recovery in the index. Second the market is complying with Central Bank expectations.

The ECB desires a weaker Euro while the Bank of England wants a stronger pound. There will be a little behind the scenes prompting taking place to encourage the sentiment that is currently driving those two currencies.

The pound now appears to have a solid base versus the Euro at around 1.1225 although attempts to push through 1.1400 have met resistance. There is good buying interest versus the dollar however and this accompanied with Euro supports (see below) may spell the end of the dollar rally.

Despite a four-day losing streak against the dollar, the pound’s ranges have been narrowing.

Today’s employment report in the UK may go some way to providing short term impetus and given the comments from MPC members, it would be a surprise if the rise in average earnings were below last month’s 2.5%. Anything either side of that figure will provide the short-term direction for the pound.

Euro correction approaching strong support.

It seems an age ago now that the market perceived a “line in the sand” from Mario Draghi for the Euro at 1.2280. It was believed that the concerns over a strong currency and its effect on the Eurozone’s weaker economies was going to force the ECB into action.

As it happened, when the present rally broke that level, traders found no resistance other than rhetorical comments and drove the single currency to the medium-term target of 1.2520 where is has failed to break higher twice now in the past month.

Now we approach the 1.2280 level again on the downside and that is sure to provide support given the level of fresh buying that took place on the way up.

The Euro reached 1.2319 yesterday and has remained near its lows overnight. Manufacturing and services activity reports are due for release later today. They are expected to correct slightly from December’s stellar performance which finally convinced the market that the Eurozone as a whole had finally emerged from the financial crisis.

It is hard to imagine sufficient impetus being created to break 1.2280 unless the Fed minutes hold a positive surprise for the dollar in which case a very rapid move to 1.2220 could be 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.”