It’s month end and I’ve seen some attributes in recent movements in the markets to re-balance the flows and while that’s likely to be part of the story it not the only reason. The big sell off from equities into bonds has found markets looking for rationale in the last two days which has seen a level of risk aversion dominate markets with stocks pressing lower while the VIX (a market measure of volatility) has broken out of its technical downtrend indicating that there may be additional turmoil ahead. While FX models would suggest the USD supply for month end flows and therefore could account for the greenback decline through yesterday’s session, the USD might yet still have further to drop through today’s fixes and into 4pm before it can regain some ground, focus then will be on tonight’s FOMC meeting.
The pound rallied through much of the afternoon yesterday as comments from the BOE’s Mark Carney found some support. We have seen a more positive start to today’s session, stocks across Europe are trading higher, albeit moderately, the USD remains weak and the euro is caught somewhere in the middle of this all.
GBP found some footing as we entered yesterday afternoon. Mark Carney was speaking to Parliament and his comments suggested that the UK labour market continues to tighten with the economy approaching full capacity. The positive outlook on the economy, despite GDP at 1.8%, allowed GBP to claw back some ground lost over the last few trading sessions with GBPUSD recovering back above 1.4200 from below 1.4000 yesterday, while EURGBP dropped back below .8800.
There’s no real data from the UK today but tomorrow and Friday the PMI data will look to back up Carney’s positive stance, if not GBP could well be under selling pressures again, and lets not lose focus on the major factor for sterling strength which is the UK Brexit process and PM May’s battle to remain in power as conflicts continue to rise in the UK government.
It was President Trump’s State of the Union address yesterday evening and while the press tend to get caught up in all the noise around his presidency, Trump preferred to focus on his huge accomplishments. He takes credit for the all times highs in stocks and while there is little doubt his tax policy and stance on regulations has been business friendly, it’s worth noting that US stocks are up over 300% since 2009 and 25% in the last year under Trump’s leadership.
As mentioned above USD supply is favoured by models for month end flows and we may see USD weakness continue into the 4pm fix this afternoon however, with the Fed on tap later this evening, markets will be cautious of holding too short USD. Should the Fed continue to favour three rates hikes through 2018 then there remains scope for the greenback to rally higher. EURUSD demand for fixes has Euro trading higher today, however any progress above 1.2450 up to 1.2500 should find sellers.