When writing these commentaries, it often feels like you could cut and paste the same text you wrote just weeks ago. The Fed, who are the only major central bank on a consistent tightening path, have for months kept up their rhetoric that rates will continue to rise at a steady pace. The US central bank again reiterated this in their minutes last night that they are on track to reach their inflation target of 2%, while they felt growth would surpass their estimates. Markets in the past couple of months seem to have been a little distracted by external factors, namely Trump and his new tax policy. Traders however couldn’t overlook the Fed’s bullish outlook that inflation may surpass their 2% target in time, leading traders to believe that rates may start to rise quicker than previously thought, to combat the rising inflation number. Some Fed officials were slightly wearier, that inflation could fall short of the committee’s objective. This split in outlook has the hawks on one side, where they feel growth and inflation warrant future hikes, while the doves are on the side of caution with a wait and see approach. In truth, no one knows what impact Trump’s tax plan will have on the US economy, and this is why markets are cautious on the greenback. Will US debt spiral out of control in a higher rate environment, will the loss of tax generated income be offset by increased the increase in growth?
USD crosses continued their push higher after the release of the minutes. GBPUSD is down over 1.5% on the week. While EURUSD is also down over 1.5% against the greenback, support here for the euro remains at 1.22 and a break below here opens further downward pressure to just below 1.21. US Government bonds also continued their upward trajectory, with the 10 year note touching 2.95%, its highest peak in four years.
In the UK now, where this morning the second estimate of GDP was unexpectedly revised down to 0.4% for the final quarter of 2017. This is down from the preliminary estimate last month of 0.5%. Household consumption grew by 0.3%, while exports declined by 0.2%. This is on the back of yesterday’s unemployment figure which also unexpectedly ticked up to 4.4%. In the past we have seen the UK economy rely heavily on the British consumer, particularly at the height of the Eurozone crisis. The UK economy may need similar support this time round, particularly while exporters remain in the dark around life after Brexit. Yesterday’s tick up in earnings is a good sign for consumers and we will continue to monitor their health here.
To the Eurozone where this afternoon we have the minutes from the ECB’s latest meeting. In the past we have spoken about the recent strength of the euro and how this could jeopardise the eurozone’s ongoing recovery. We saw ECB President Mario Draghi speak of his concern around the euro’s strength last month, so traders will be keeping a close eye for similar references in the minutes.