Sentiment & risk are the key drivers

January 25th: Highlights

• Risk appetite still driving market movements
• GBP struggles with concerns over economic stability
• Euro still weaker after ECB announcement
• Fed to update economic outlook

Sterling Comment

Global Comment

The EUR slipped lower when PMI data was lower than expected when the ECB’s indication of further QE was still ringing in the ears of the market. On the calendar, we have ECB President Draghi speaking again tonight and Eurozone CPI is due out on Friday.

The US equities rallied on Friday and the USD lost a little ground as safe haven trades were unwound. The main focus on the calendar this week is the FOMC meeting and statement on Wednesday. If the Fed is dovish, perhaps pointing to recent Equity weakness then the USD may sell-off and if the statement is more hawkish, perhaps hinting that March is when rates may raise again, then logically the USD will be bought and strengthen. US GDP will be released on Friday as well and will give direction.

A rebound in oil drove the commodity currencies higher. The CAD and ZAR surged over 1.5%, the AUD added 1% and the NZD is up by 0.6%, all helped by risk sentiment and the lasting effect of Draghi’s ECB-backed promise to save the World with more European liquidity.

But can we really trust a market recovery that is built on a short-covering rally in the oil price and little more than idle chatter from the ECB? This morning, currency markets are showing that the wider risk appetite has waned a little, with the oil price turning lower again. Oil, and the associated appetite for risk, seems to be conducting the short-term daily market trends more than anything else at the moment.

Have a great day!