Market Info

USD link to stock markets re-established. GBP back above 1.40. Main highlight this week is Fed Chair Powell’s testimony on Tuesday.

26/02/2018 | OzForex

Monday 26 February

Great British Pound

The GBP ended the week lower against the USD and twice finished at the bottom of our one-day performance tables. The low point came on Thursday morning London time around 1.3875 before a recovery on Friday in to the high 1.39’s. Overnight in Asia, as stocks have rallied further, the USD has fallen against all the major currencies and the GBP is back at 1.40 for the first time since Wednesday last week.

Despite the softness of incoming economic data, policymakers are still talking up the prospect of further rate hikes. An interview with the Sunday Times revealed that the newest MPC member, Terry Ramsden, who was one of the two doves to vote against a rate hike in November, has now changed his mind. “There does seem to me more impetus on wages. We all will keep a close eye on what happens through the early part of this year to see if that forecast [in a Bank survey] of wage growth picking up to 3% is realised. But certainly relative to where I was, I see the case for rates rising somewhat sooner rather than somewhat later… “The economy has a lower speed limit than it did. We already had a productivity growth puzzle, but Brexit has reinforced things.”

On the never-ending Brexit saga, Prime Minister Theresa May issued a weekend statement saying, “Delivering the best Brexit is about our national future, part of the way we improve the lives of people all over the country. The decisions we make now will shape this country for a generation. If we get them right, Brexit will be the beginning of a bright new chapter in our national story.” She will hold a special cabinet meeting on Thursday to get sign off on the plans discussed at last week’s ‘offsite’ before a speech publicly setting out her position on Friday, expected to be in Newcastle. For all the brave and upbeat talk, it is clear to everyone that the real decisions on Brexit are going to be made in Brussels. European Council President Donald Tusk spoke about 'Brexit in talks with media on Saturday. He warned the British government that Brussels would not accept what he views as cherry picking. "If the media reports are correct, I am afraid the UK position today is based on pure illusion."

US Dollar (USD)

GBP/USD expected range: 1.3935 – 1.4140

For most of last week, the US Dollar’s fortunes largely mirrored those of the main US equity indices. At times when stock markets were rallying, the USD had an observable tendency to sell-off, whilst any sign of stress in equities had the opposite effect, leading to something of a safe-haven bid. The 2018 low point for the USD index came back on Friday February 16th at 87.95. As the stock market sold-off on Monday, Tuesday and Wednesday last week – culminating in a sharp dive lower after the FOMC Minutes – so the USD index rose to a best level for the week of 89.85; a 10-day high. On Thursday, stocks recovered and the USD fell (no surprise there) but on Friday the inverse relationship seemed to break down somewhat. Equity index futures were up almost the whole day but the USD was little moved, ending the week only a down three or four-tenths from Thursday’s best level. In the first trading session of the week in Asia, the old pattern has reasserted itself; a triple-digit gain for the DJIA has pushed the USD index around three-tenths of a point lower to 93.30.

The last FOMC meeting was back on January 31st at that point in time, stock markets hadn’t yet started the dramatic decline which began after the labour market and average earnings numbers on Friday February 2nd. In that sense, last week’s Minutes were out of date even before they were published. Since then, we now have a new Fed Chairman and this week will be his first semi-annual monetary policy testimony to Congress. Most of the published calendars for this week will show this being on Wednesday but it has in fact been moved forwards 24 hours to 10am Tuesday, apparently because the casket of preacher Billy Graham will be lying in state in the Capitol Rotunda for two days from February 28th; only the fourth ever private citizen to do so.

As well as Jerome Powell’s testimony, there is a raft of US economic data scheduled for release this week, although the first Friday of the month of March won’t bring the payroll numbers due to the Presidents Day holiday late in the already-short month of February. Tuesday brings wholesale inventories, the advanced goods trade balance, durable goods, and consumer confidence; the first three of which will all feed directly into the Atlanta Fed’s GDPNow model. Wednesday is the Chicago NAPM and existing home sales, whilst Thursday brings the personal income, expenditure and deflators as well as the ISM manufacturing survey. There’s scope for plenty of volatility around each of the data prints, though the tone and content of Mr Powell’s remarks will be key ahead of the March 22nd FOMC meeting. The USD index opens this morning in around 93.30; still more than a point higher than its 2018 low.