Market Info

USD steadies after FOMC Statement. GBP awaits PMI data as PM May talks about EU migration

01/02/2018 | OzForex

Thursday 1 February

British Pound (GBP)

After its roller-coaster ride on Tuesday which saw it dip below 1.4000 then jump 1½ cents, GBP/USD yesterday extended its gains to a high around 1.4220; its best since Friday afternoon. Performance on the crosses was somewhat more mixed; GBP was steady against the CAD, down against a buoyant NZ, up a little against the EUR and up most against the AUD. Overnight in Asia today, this mixed performance has continued with GBP/USD down around half a cent from Wednesday’s high but GBP/AUD up by a similar amount. UK Prime Minister Theresa May said in Beijing that she is committed to deepening Britain’s relationship with China in light of Brexit and would explore all options for a future trade relationship. She might well need them as European Commission officials are said to have rejected the City of London’s proposal to strike a post-Brexit free trade deal on financial services. According to Bloomberg, while the British government is aiming for a wide-ranging agreement to give financial institutions full EU access, a restricted approach similar to that which Canada enjoys is the only viable option, Commission officials said in a presentation to representatives of the 27 remaining EU nations. The EU could not have made it clearer that the better trade deal the UK wants after 2019 depends crucially on accepting the so-called “four freedoms” of the Single Market: free movement of goods, capital, services, and labour. Yet, speaking with journalists on her China trip, the Prime Minister said that that EU citizens who arrive during the post-Brexit transition period must not have the same rights as those who came before. It is very difficult to see how this particular circle can be squared. The immediate outlook for the GBP, however, will more likely depend on this morning’s manufacturing PMI survey which ended last year at 56.3. Ahead of that, the GBP opens this morning at USD1.4175, GBP/AUD1.7670 and GBP/NZD1.9290.

US Dollar (USD)

USD/GBP expected range: 1.4070 – 1.4260

For global foreign exchange markets, there didn’t seem anything too troubling in either the tone or content of President Trump’s State of the Union address but such is the prevailing negative sentiment amongst analysts that the US Dollar went down anyway. The USD index stood at 88.90 when the President began but it was then downhill all the way until late afternoon in Europe where it finished at 88.52. The USD then began to rally ahead of the FOMC interest rate decision and by the time the Statement had been released and examined, the USD had regained all its earlier losses. Putting two FOMC Statements side by side always feels a bit like the job the Kremlinologists had back in the Soviet-era when they’d look at a photograph of the Politburo and see who had moved a pace or two to the left or right, who was missing and who were the fresh new faces. The Fed said that, “the labor market has continued to strengthen and economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent”. So far, pretty much exactly what was said in December. But, whereas last month inflation was expected to, "remain somewhat below 2 percent in the near term", this line has been dropped and instead, "Inflation on a 12 month basis is expected to move up this year”. For choice, your author interprets this is a slightly more hawkish stance. With the two political and monetary policy set-pieces of this week now out of the way, there’s a whole bunch of US economic data over the next two days. This afternoon brings the weekly jobless claims, both versions of the manufacturing PMI survey (Markit and ISM) as well as construction spending. Tomorrow is the first Friday of the month so it’s the non-farm payrolls and earnings numbers plus factory orders, durable goods and the Michigan consumer confidence survey. The Atlanta Fed will be updating its GDP forecast later this evening and the USD index opens in Europe today at 88.90.

European Euro (EUR)

GBP/EUR expected range: 1.1360 – 1.1460

The EUR reached a best level of USD1.2470 by mid-afternoon Wednesday. It then abruptly turned around to lose a quick 70 pips either side of the FOMC Statement. Traders also reflected on comments from ECB executive board member Benoit Coeure, in Dublin for the European Financial Forum. In a TV interview he said, “We have agreements that we should not target our exchange rates… we want to see exchange rates that reflect economic conditions in different places. We are not going to change it.” Mr Coeuré said the ECB has been clear that it expects interest rates to remain at the current level, very low, for an extended period of time, and well past the horizon for asset purchasers. "Well past means well past. So that is not a discussion we are having, and we really expect interest rates to remain very low for an extended period of time." After Germany’s softer than expected CPI on Tuesday, France came to the rescue yesterday with an above-consensus 1.5% y/y increase in inflation, largely driven by an increase in service sector prices. This meant that the Eurozone aggregate numbers showed a very small drop to 1.3% which was higher than the median estimate of 1.2%. The core rate of inflation excluding food and energy rose from 0.9% to 1.0% and though it’s still some way below where the ECB would like, it is at least now moving in the right direction. With the inflation numbers now behind us, attention at the start of this new month today will be on the manufacturing PMI’s across the Eurozone. The ‘surprise factor’ is limited by the pre-release of flash estimates in France and Germany but we’ll get fresh information on how other Eurozone countries are faring at the start of 2018. The EUR opens in Europe this morning at USD1.2400 and GBP/EUR1.1430.