Daily Market Brief 27 March 2018

Sterling Rising on Rate Hike Hopes

Morning mid-market rates – The majors







March 27th: Highlights

  • May hike bets increasing again
  • Weidmann weighs into Eurozone rate discussion
  • Dollar lower as trade fears recede

Pound gains from favourable tailwinds

The pound continues to be “flavour of the month” as traders price in a 62% chance of a rate hike in May. This is a little lower than the 70% chance seen a few weeks ago but coupled with recent data releases and the positivity engendered by the Brexit transition agreement, Sterling is testing the top of its range so far in 2018.One member of the Bank of England’s Monetary Policy Committee, has already said that the UK will need to raise rates twice a year as they return to what are “normal levels”. The previously dovish Gertjan Vlieghe believes that now that the Bank is in a “tightening cycle”, it needs to commit to a return to normalization.

The potential for interest rate rises will only provide so much impetus to the currency and further positive factors will be needed to continue the recent rally.

The pound reached a high of 1.4245 yesterday having rallied by close to 4% this month. Versus the Euro the pound has fallen a little from the high of 1.1527 as the single currency has recovered a little. It closed yesterday at 1.1413 and has continued to exhibit a weaker tone overnight.

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Euro rallies on rate talk

Jens Weidmann, the President of the Bundesbank and German candidate to be the next President of the European Central Bank spoke yesterday of the likely need for rates to be raised in the Eurozone by next summer. This continued recent talk, questioned somewhat by weaker than expected data, that the Eurozone economy should be sufficiently robust and inflation on an upwards trajectory for tightening to commence.Weidmann commented that “expectations of a rate hike in the middle of 2019 were not completely unrealistic”. Mario Draghi the current ECB President probably won’t feel the need to comment on Weidmann’s remarks since his position on rate hikes is well known. Comment is more likely from the Governor of the Banque de France, François Villeroy de Galhau, who is likely to be put forward as a more moderate candidate than the German Central Banker, as the two set out their stalls for the “top job”.

The Euro was stronger yesterday on the back of the comments, reaching a high of 1.2462 but it will take more than rumours for it to test the resistance at 1.2540. Last week’s narrow range of 1.2238 – 1.2390 has been broken but it remains within its wider range that has been in place since late January.

Trade war talk recedes as China seeks continued dialogue

The dollar index dell back towards its recent lows yesterday as the JPY fell following its rise on concerns over an escalation of the potential trade war between the U.S. and China and concerns that Prime Minister Shinzo Abe may lose his grip on power.Chinese Premier, Li Keqiang, the principal architect of Chinese economic policy, reacted to President Trump’s recent rhetoric by calling for more talks on how to continue to grow American exports to China. This first response is a typical manoeuvre to show that they are willing to enter talks and gain the moral high ground by not taking any firmer action.

Should President Trump continue to criticize Chinese trade policy, he can expect a more stinging response.

This week’s Q4 GDP data will provide a clue as to the reasons for the slightly dovish comments from Fed Chairman Jerome Powell last week as he would have already seen an advance preview of the data.

As the Bank of England and possibly the ECB turn towards a tightening bias, the dollar’s rate advantage will be eroded and fresh historical lows for the dollar index below 88.20 could be seen. Yesterday the dollar index fell to 88.98 it lowest level in a little over a month.

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.”