Daily Market Brief 21 March 2018

Sterling lower as inflation Falls

March 21st Highlights

  • Markets await employment data and MPC
  • FOMC meeting more about the outlook than imminent hike
  • Euro testing bottom end of the recent range

Pound loses Brexit Gloss

The (misplaced) euphoria over the deal reached between the UK and EU receded a little yesterday as the realities of the economy gave traders more tangible evidence on which to base their decisions.

Inflation fell in February by more than expected and the chances of a rate hike in May receded a little. Headline inflation was at 2.7% as the effect of the fall in Sterling precipitated by the Brexit referendum result faded from the calculations.

Sterling remained at or around 1.4000 for most of the day reaching a low of 1.3982 and closing at 1.3998. It rallied versus the Euro as the single currency continued its recent correction. It made a high of 1.1436 but has retraced a little overnight as the Euro approaches strong support levels.

Today sees the final piece of economic data released before tomorrow’s MPC meeting. The employment report will confirm a headline rate of 4.4% but it is wage growth that will most interest the market. It is expected to have grown from 2.5% in January to 2.6% in February.

Following yesterday’s reported fall in inflation, the gap between prices and incomes is closing fast and could move back into positive territory as soon as this month.

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FOMC expected to provide policy clarity

In recent years the Federal Reserve has lost a little of its dominance, often being second-guessed by the market, a situation that would have been unlikely under the Chairmanship of either Alan Greenspan or Ben Bernanke.

The “reign” of Janet Yellen ushered in a more advisory attitude which, on the one hand, used the market to react to future expectations, giving them greater impact, but on the other, took away a little of the Fed’s stature as it was almost discussing its policy decisions with the market.

Today’s FOMC meeting will mark the start of a new era ushered in by the debut speech of Jay Powell the new Fed Chairman. The short-term direction of the dollar will be determined by whether his announcement of the first rate hike of the year will be followed up by sufficiently hawkish comments to convince traders that there will be four rather than the three most recently expected.

It will be a major test for Powell who will be outside his comfort zone; first taking advice from fellow FOMC members and then delivering a speech based on anecdotal evidence rather than hard fact.

The dollar index rallied as traders’ expectations grew. It reached 90.45, within touching distance of the 90.50 resistance that will have to be conclusively broken for any continued rally to be sustainable.

Euro falls as hawkish talk fades

It is extremely unlikely that the ECB is discussing monetary policy more than a year in advance as was mooted on Monday although there are most likely almost continuous talks surrounding the removal of the Asset Purchase Scheme. Even ECB President Mario Draghi has acknowledged that a tapering of the scheme will need to take place, but he is in no hurry to commit.

This is a key difference between the ECB and Fed and has led the ECB close to pre-eminence.

The Euro fell through strong support at 1.2260 yesterday as the expectations for confirmation of a four-hike strategy form the Fed grew.

The ECB’s benign neglect of the Euro’s rate is most likely to be tested by a rally rather than a fall since they are less concerned by the inflationary consequences of a gradually weakening currency than they are of the effect on weaker Eurozone economies of a strengthening one.

It reached a low of 1.2241 yesterday and has rallied a little overnight but remaining below the 1.2260 level.

The major event for the Eurozone this week is the Heads of Government meeting on Friday, but any mystery has been removed as the main item on the agenda, the Brexit transition agreement, has already been passed.

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.”