It was a US holiday yesterday and markets took the opportunity to push the USD index to fresh 3 year lows while EURUSD and GBPUSD amongst others broke to long term highs, EURUSD extended back above 1.2200 and highs were posted just short on 1.2300. This was quite an acceleration higher and if we consider in the last 2 months the ECB have extended their QE program, while the Fed have hiked rates (with the target to raise rate three more times in 2018), and yet EURUSD trades up over 6% in that time frame. GBPUSD saw highs just above 1.3800, levels last seen the night of the Brexit vote as news filtered through that the UK would in fact look to leave the EU. GBPUSD is now up over 16% from its October 2016 lows while the pound still remains near historically weak vs the euro. The extended moves in recent days have seen a notable pick up in volatility of the FX markets and needless to say that’s been most evident in USD crosses.
The drive higher in euro over the weekend was helped by comments from the ECB’s Ardo Hansson yesterday. He suggested that bond buying could stop after September. Markets have already been positioning for a slightly more hawkish stance from ECB members following the release of the ECB’s minutes last Thursday but a dead stop and no further tapering was always going to be on the cards. The thing is, Hansson is a known hawk but his comments that the rate of the euro’s appreciation poses no threat to inflation. He also suggested that the ECB could look to raise rates before they ended their reinvestments. Eurozone data is light today, and attention will be on German CPI for Dec due tomorrow and is set to remain unchanged at 1.7%. This will likely set the tone for the Eurozone’s reading due Thursday. Otherwise the single currency may well look elsewhere for direction.
Elsewhere in the morning session we’ll be keeping an eye on some GBP price action. The headline figures for CPI have just been released with a slightly weaker reading in core CPI at 2.5%. Unlikely to be too ground breaking in terms of data flow, as always for the pound the real focus remains on Brexit progress. Should we get to the end of Q1 with little progress on negotiation you could see UK businesses getting a little more jittery.
We speak to a broad range of client across all spectrums of industry and their primary approach to all future longer term investment appears to be caution. In shorter timeframes, while the UK still have full access to the open market most are confident about business, however the lack of progress and clarity around a transition period appears to be what makes people most apprehensive.
The US returns to market today and we’ve minor data points to look at. Nothing really to change the outlook for the greenback today however and while there has been some recovery in the USD this morning, the break to fresh 3 year lows and below major support suggests the slide may not be over just yet for the greenback. Tomorrow’s print of Industrial and Manufacturing Production, as well as the Fed’s beige book are the picks of the releases, while we’re likely to see a little more action in the USD from the Fed speak later tomorrow tonight with Charles Evans set to speak on monetary policy and the economy, while Loretta Mester will be talking about Mon Pol communication.