Market Info

After turmoil in US stocks, currencies are relatively quiet. GBP steady at lower levels, RBA leaves rates unchanged.

06/02/2018 | OzForex

Tuesday 6 February

British Pound (GBP)

The pound had a bad day on Monday as the combination of domestic political uncertainty, the resumption of formal Brexit negotiations and poor incoming economic data finally took its toll. By early afternoon it was down below USD1.4000 and though it managed to find some support around last week’s low, the subsequent bounce was far from impressive. As the sell-off in US equities accelerated and the USD was bid, GBP/USD closed in New York at a near 2-week low and finished firmly at the bottom of our one-day performance table. In economic data, the UK service sector PMI fell from 54.2 in December to just 53.0 in January; the slowest upturn in services output for 16 months. Growth was reportedly curtailed by the loss of existing clients and lingering concerns surrounding the UK’s exit from the EU. January data pointed to a slowdown in growth of services activity across the UK, which stemmed from relatively weak gains in new work. Job creation nonetheless picked up as companies retained positive expectations surrounding the outlook. Although the latest results revealed an easing of inflationary pressures, rates of increase in both input costs and output charges remained above their long-run trends. In a meeting at Downing Street between UK Brexit Minister David Davis and Chief EU negotiator Michel Barnier, Mr Davis claimed with a completely straight face that, “the UK government has published a great deal about what it wants. It wants a comprehensive free trade agreement, and a customs agreement, allowing trade to be as frictionless as possible. It is perfectly clear what the UK wants”. For his part, Mr Barnier said, “Without the customs union, outside the single market, barriers to trade and goods and services are unavoidable… the time has come for the UK to make a choice”. This, of course, is the very opposite of what the Prime Minister wants. Any clear choice or hard decision will immediately inflame half her Cabinet and will heighten pressure for her to quit as Prime Minister. There is no ‘unity candidate’ waiting in the wings because there is no unity on the Government side in the House of Commons. At some point, if the UK political situation continues to deteriorate, a ‘Corbyn discount’ may even have to be priced into the pound.

US Dollar (USD)

USD/GBP expected range: 1.3920 – 1.4090 After Friday’s 666 point drop for the Dow Jones Industrial Average, Monday was a day of utter carnage in the US equity market. An initial 300 point decline in the DJIA was almost fully reversed by lunchtime but in the last few hours of trading the index went into freefall, losing well over 1,000 points to end the day down 1175; the biggest ever points drop, albeit in percentage terms only the 112th largest drop in the 122 years since inception. The VIX index of volatility, meantime, had its biggest ever daily jump and will go down in the history books along with Lehman, the ‘flash crash’ and the US downgrade. Amidst the turmoil, the US Dollar was steadily bid throughout the day and its index against a basket of currencies is now more than a full point above last Thursday’s low. It still hasn’t recovered all the losses from Davos but it looks in technically much better shape than it did just a few days ago. In the latest economic news, the ISM non-manufacturing index jumped 3.9% in January from an already-high 56.6 in December. This was the 96th consecutive month of expansion in activity and if the headlines were good – the index was at its highest level since August 2005 - the details were even better. New orders jumped over 8 points to 62.7; the highest since January 2011 whilst employment surged to 61.6; the highest since records began in 1997. Overall, the majority of respondents’ comments were positive about business conditions and the economy. They also indicated that recent tax changes have had a positive impact on their respective businesses. New Federal Reserve Bank Governor Jerome Powell was sworn in yesterday and there was no shortage of analysts pointing out comparisons between the situation today and when new Chairman Alan Greenspan took office on August 11th 1987; barely two months from the stock market crash of Black Monday, October 19th, that year. There are plenty of Mr Powell’s colleagues set to give speeches this week; Messrs. Bullard, Evans, Dudley, Kaplan and Harker will all be offering their views on the economy. It will be interesting to see if the speakers have soothing words for stock market investors or focus, instead, on the continued normalization of US monetary policy.