This morning markets look to be brushing off any of the hawkish sentiment that Wednesday’s FOMC minutes contained. Yesterday saw the US 10 year yield fall off its four year high, while both the pound and euro recouped some of their losses from earlier in the week. Investors for now appear happy to brush off any notion of 4 rate hikes this year from the Fed, as equity markets also rebounded after Wednesday’s minutes. The minutes however were far more balanced than the markets appear to be letting on, but last month’s retail sales figure seems to be keeping the bears at bay. In truth, markets and central bankers appear to be in a bit of a dilemma, with the major central banks looking to tread carefully to avoid causing another market tantrum, while investor have trust issues with what policy makers preach, and understandably. One example which springs to mind was when Mark Carney spoke at the Lord Mayors Dinner back in 2014, nearly four years later and rates are as you were, despite a cut and a hike in-between. The BOE Governor had a similar hawkish outlook on rates earlier this month, with markets pricing in a rate hike as early as May now.
It fair to say that the pound has had a difficult week in terms of fundamental data. We saw UK unemployment rates rising unexpectedly to 4.4%, while public sector borrowing also rose more than expected to 11.6bn. Yesterday we had another miss, this time in the form of Q4 GDP which was downgraded to 0.4% from 0.5%. The strength in the pound may be coming from Brexit related noises in the background, where this week the Labour suggested that they could back staying in a custom union with the EU. We will be hearing Theresa May’s thoughts for her vision on life after Brexit next week, so we may see plenty of volatility around this event.
The euro, which also had a poor weak on the fundamental data aspect with Manufacturing and Services PMI data down across the region. This along with yesterday’s weaker than expected German IFO report for February. However the euro got some respite after the ECB minutes unveiled that some members wanted to drop the easing bias on the asset purchase program, arguing that economic conditions warranted moving to a neutral stance, this in turn helped the single currency pull away from its lows of the day.