If you were to take a look at equity markets, one would think all is great in the world. Almost every day we see flashes of “all-time highs” or “fresh annual highs” or rallies in excess of 2/3% per day. This was the case yesterday where the UK’s FTSE surged to record levels, the pan European StoXX 600 hit 13 month highs and overnight the Nikkei hit fresh annual highs, these certainly aren’t the central bank drip fed markets that we have been used to for almost the last 10 years. So has the tide turned or are markets becoming careless/numb to risks?
Better German employment and inflation figures did little to help the Euro yesterday as it gave up ground across the board against its major counterparts. EURGBP was down almost 1% at one stage from yesterday’s highs, although did finish slightly higher. EURUSD pressed fresh 14 year lows once again as stronger than expected manufacturing data from the US helped boost the greenback, EURUSD dropping to 1.0340 before bouncing higher as the USD sell off began later in the afternoon, in the same movement GBPUSD traded 1 pip below its December lows before rebounding and is now up almost .75% from those lows. Risk remained in favour overnight as Asian markets traded higher, while the USD traded marginally lower. JPY has almost done a full circle since the close of Europe yesterday, the yen faced selling overnight as Japanese stocks surged but a weaker USD this morning has seen a retrace.
The Greenback rallied over 1% from yesterday lows as manufacturing data from the US proved to be firmer than expected, the USD index trading to fresh high, 103.80, a level not seen since December 2002. The Markit Manufacturing PMI and ISM Manufacturing PMI figures posted 54.3 (vs 54.2 expected) and 54.7 (vs 53.8 expected) respectively. This caused the USD to surge and was the key driver in USDJPY rallying to within a couple of pips of its December highs, while as mentioned above it was a similar story with GBPUSD, while EURUSD broke support and traded to those 14 year lows. It was then the tide turned for the USD, as the greenback sat at major support/resistance areas USD selling quickly took over and USDJPY was down over 1% within three hours. This is a warning sign for us, again we continue to remain cautious of USD strength and while data has been improving it is still not matching the pace we would expect for the Feds path to rate hikes, and Q1 in the US is notoriously weak (or has been for the last several years).
The US calendar is quiet for much of the day but later this evening (7.00pm GMT) the FOMC minutes from the December meeting are due across the wires and obviously carry some weight for the USD and the potential for volatility across pairs. The USD has been surging since the December meeting, the USD index up 4.4% at highs but the USD continues to run into sellers at these higher levels. The rally began as the Fed upgraded their growth and inflation forecasts and projected three possible hikes for 2017, yet Janet Yellen also highlighted that much of this remains unknown and based around a shift in Fiscal policy as Donald Trump takes control of the US presidency in just over three weeks. Should we see similar caution from the Fed minutes, i.e. Yellen and co cautious on the prospects of Fiscal policy/growth, then the greenback may find itself running into more aggressive sellers. Should the USD rally, EURUSD has support at yesterday’s lows at 1.0340, while GBPUSD has support towards 1.2200 which should provide some opportune buying levels for GBP and EUR, while JPY runs into buyers above 118.50.
The Euro took little solace from improving German data yesterday as it declined against all major counterparts and today’s attention will be on Decembers preliminary CPI inflation figures as the rest of the calendar is relatively mute aside from regions PMI figures. The headline inflation figure for the Eurozone is expected to have risen to 1% from .6% through December on an annual basis, with the core reading due to remain unchanged at .8%. If the single currency is to start a comeback it will likely need figures marginally better than those expected, especially following yesterday’s decent German print. For the Euro, the fact remains that while the ECB continues on their easing path, major competitors like the US are looking at tightening or like the UK, reassessing further action as inflation kicks off. EURGBP traded as low as .8450 yesterday but has since recovered back above .8500. For now, the pair looks trapped between the 200 day moving average at .8415 and the 100 day moving average at .8553 and larger move above .8600 has even more sellers of Euro lined up.