Market Info

Currencies generally calm amidst stock market volatility with no major economic releases today. GBP/USD trying to regain 1.40.

07/02/2018 | OzForex

Wednesday 7 February

British Pound (GBP)

Having broken down through USD1.40 on Friday evening, the Pound’s fall accelerated in Europe on Tuesday, reaching the mid 1.38’s during the London afternoon immediately prior to the opening of the US stock market. After a very sharp initial decline, equities were soon trading in the green and the strong bid to buy USD quickly disappeared. Though the pound ended the day down against the AUD, NZD, CAD and EUR, the so-called ‘cable rate’ was marginally up even though it couldn’t get back on to a 1.40 big figure. The overnight session in Asia has been mixed with the GBP steady against EUR and USD but nearly a cent firmer against both the Antipodeans.

As political tempers run very high amongst members of the UK Government as well as its backbench MP’s, the Guardian newspaper las night splashed an exclusive report – followed by others this morning - that, “Brussels will have the power to punish the UK at will during the Brexit transition period by closing off parts of the single market to British companies, according to a leaked legal document drawn up by the EU.” The leaked position paper, entitled Transitional Arrangements in the Withdrawal Agreement, lays out in legal language the EU’s terms for the transition period and says use of focused sanctions to “suspend certain benefits ... of the internal market”, would give the EU the freedom to punish the UK without prematurely terminating the transition period and risking damage to its economic interests. That is the type of threat which is hardly going to soothe nerves in the UK…

There are no major economic releases in the UK today but with growing tensions on all sides of the ruling Conservative Party, it would be no great surprise to see international investors hedging some of their GBP exposures after January’s sharp and generally unexpected rally.

US Dollar (USD)

USD/GBP expected range: 1.3940 – 1.4090 With very real concerns that Tuesday might develop into another bloodbath for US equity markets, the US Dollar index against a basket of major currencies rose as high as 89.70 in the New York morning. This took it right back to the level at which it stood before US Treasury Secretary Mnuchin’s comments in Davos which so enraged ECB President Mario Draghi. As stocks regained early losses, so the USD was sold and the index gave back around half a point even as bond yields began to climb once more. Overnight, with stock markets showing Bitcoin-like levels of volatility, the USD has stabilized somewhat although no-one can confidently predict where equities will be over the next few hours, let alone by the end of the day.

St. Louis Fed President James Bullard is not an FOMC voting member this year but markets are hanging on every clue they can. In a speech at the University of Kentucky’s College of Business and Economics, Bullard said higher wages was not a key driver of inflation. “I caution against interpreting good news from labor markets as translating directly into higher inflation… The empirical relationship between these variables [wages and inflation] has broken down in recent years and may be close to zero… Continued strong labor market performance is unlikely to translate into meaningfully higher inflation,” he concluded. We said here yesterday that, “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.” There are four more still scheduled this week but the first out of the traps was definitely in market-calming mode.

Messrs. Evans, Dudley and Kaplan are all due to give speeches later today, though there are no top-tier US economic data releases scheduled. After the figures on the merchandise trade deficit were published yesterday, the Atlanta Fed revised down its estimate of Q1 GDP from 5.4% to 4.0%.

European Euro (EUR)

GBP/EUR expected range: 1.1225 – 1.1345 As with most of the non-US dollar currencies, the low point for the EUR on Tuesday came early in the European afternoon as nervousness mounted around what lay in store for US equity markets. As a much-feared third consecutive day of extreme downside pressure failed to materialize, EUR/USD rallied to just about regain a 1.24 handle late in the New York day. The overnight session in Asia has been exceptionally quiet with barely 20 pips separating the high and low in EUR/USD.

Monetary policy has been famously described as like pulling on a brick with a piece of elastic. You pull and pull and nothing happens, then suddenly it hits you in the face. It seems a particularly good time to recall this analogy after yesterday’s German Construction PMI which rose sharply from 53.7 in December to 59.8, its highest reading since March 2011 (and the joint-fourth best seen since the survey began in late-1999). A warmer than usual January resulted in a sharp and accelerated increase in total industry activity across Germany’s constructor sector and housing and commercial activity rose at some of the fastest rates seen in the survey’s 18 ½ year history, while growth in new orders was at a record high. Right across the Eurozone, there are many indicators of output, employment and activity all at multi-year highs. Investors buying the euro believe the metaphorical brick will be moving quickly in the first half of next year,

In other news, Reuters reports that, “Industrial workers and employers in southwestern Germany have struck a hard-fought deal on pay and working hours, setting a benchmark for millions of workers across Europe’s largest economy”. The agreement between labor union IG Metall and the Suedwestmetall employers’ federation foresees a 4.3% pay increase from April and other payments spread over 27 months. Analysts calculate it is equivalent to a 3.5% annual raise. This morning, the European Commission is due to release updated economic forecasts for the Eurozone.