Market Info

USD rallies ahead of Trump’s “State of the Union” speech tonight. GBP pressured on Brexit and UK politics. BoE Governor Carney speaking this afternoon.

30/01/2018 | OzForex

Tuesday 30 January

British Pound (GBP)

The British Pound’s remarkable 11-day sequence in which it never tested the previous day’s low against the US Dollar was good while it lasted, but has now come to an end. At one point, GBP/USD was almost 9 cents higher than its starting point of 1.3460 on January 11th having reached a best level last Thursday around 1.4330. Yesterday it didn’t just break below Friday’s low of 1.4145, but traded all the way down to 1.4035; the first ‘down day’ for the GBP in 2½ weeks. Overnight in Asia, the GBP has remained pressured and a break through yesterday’s low would open up 1.4000 then 1.3925.

A confidential government analysis of the economic impact of Brexit was reported to have been shown to Cabinet Ministers over the weekend, though in order to minimize the risk of leaks, hard copies were not made available. Needless to say, the assessment duly appeared on the internet overnight. The Times today reports that under a comprehensive free trade agreement with the EU, British growth would be 5 per cent lower over the next 15 years compared with present forecasts. The “no deal” scenario, which would mean Britain reverting to World Trade Organisation rules, would reduce growth by 8 per cent over that period whilst the softest Brexit option of continued single-market access through membership of the European Economic Area would, in the longer term, still lower growth by 2 per cent.

Bank of England Governor Mark Carney is due to give evidence to the House of Lords Economic Affairs Committee at 3.30pm this afternoon. During his Q+A session at Davos last week, he attempted to quantify the loss of GDP which resulted from the EU referendum result 18 months ago and might well come in for some tough questioning over this. Amidst all the intrigue, the GBP opens this morning in Europe at USD1.4020, GBP/AUD1.7395 and GBP/NZD1.9185.

US Dollar (USD)

USD/GBP expected range: 1.3925 – 1.4110

Breaking news - the US Dollar didn’t fall yesterday! The USD index reached a low point on Thursday last week of 88.20 before rallying into the NY close and then holding around half of its gains on Friday. It opened on Monday morning in Sydney around 88.75 and then climbed on to an 89 ‘big figure’ for the first time in four days. Its gains we’re broad-based and saw the USD rise against every major currency to take a rare top spot on our one-day performance table.

US economic data on Monday were pretty much in line with consensus expectations. They may be a bit obscure for some of our readers, but the personal consumption and spending figures are very important to the Fed for two reasons: First, they feed directly into estimates of GDP and second, they are accompanied by so-called a PCE deflator which is the measure of inflation the Fed is targeting. Whereas the RBA in Australia and the RBNZ in New Zealand have CPI targets, the US Fed has a PCE target. The headline measure of PCE inflation was 1.7% with the core ex-food & energy number as expected at 1.5%.

After the US numbers were published, the Atlanta Fed updated its GDPNow model. It had overstated the Q4 numbers last week but its first estimate of Q1 2018 is a very punchy 4.2% which would more than make up for any disappointments last Friday. Its’ next update will come on Thursday after the ISM survey and official numbers on construction spending. For today, consumer confidence is the main data point but the big event of the day will be President Trump’s State of the Union address at 9pm EST. The speech is titled, “Building a safe, strong and proud America”. With US 10-year bond yields having hit a fresh cycle high of 2.71%, the USD index opens in Europe today at 89.15.

European Euro (EUR)

GBP/EUR expected range: 1.1310 – 1.1400

EUR/USD hit a 3-year high of 1.2530 during the ECB Press Conference last Thursday before then falling one and a half cents on President Trump’s comments to CNBC about wanting a stronger Dollar over the longer-term. On Friday it couldn’t regain the highs, whilst yesterday’s high was again at a lower level than the day before. All eyes will be on technical support around 1.2345 and, if this breaks, the EUR could quickly unwind all the gains made since Mnuchin’s comments about the Dollar last Wednesday morning.

Speaking in Brussels yesterday, the ECB’s chief economist Peter Praet said the European Central Bank will only stop pumping cash into the euro zone economy when it is confident that inflation is heading towards its target without its extra help. Praet is one of the key supporters of the ECB’s €2.55 trillion bond-buying programme and was responding to calls by officials – notably in Germany and the Netherlands - to stop the scheme later this year. Despite these dovish remarks, German 5-year bond yields yesterday moved back into positive territory for the first time since late-2015 whilst 10-year bunds were up 6bp to 0.69%.

Today in the Eurozone brings Q4 GDP figures where consensus estimates are for a +0.6% quarterly increase. We’ll also get German CPI figures which will then see analysts firming up their forecasts for the Eurozone CPI numbers on Wednesday. After falling around a quarter of a cent in Asia overnight, the EUR opens in Europe this morning at USD1.2355 and GBP/EUR1.1350.