Market News & Insights
15 March 2017

Fed to Dictate the Next Step

Yesterday was about absorbing information. Markets soaked up Article 50 details and duly assessed potential time frames for when the UK would act. They also took on board the potential for another Scottish referendum and the likelihood of this occurring during the negotiation process. The markets take on the latter is that it will likely come up against considerable headwinds, a petition to block the referendum is rapidly approaching 100,000 votes and thus will likely have to face parliamentary discussion. Many feel that this is really part of a larger game plan from Sturgeon and rather than actually looking for a referendum, she’s using it as a bargaining chip, however early polls would suggest many in Scotland would oppose a vote and this has taken some of the risk out of GBP. There was also some suggestion yesterday that the EU leaders would not discuss the UK’s plan until at least June

In the US, the dollar pressed higher as storm Bella hit the north east of the country and markets traded in narrow ranges ahead of today’s main event, with the FOMC due to take center stage and Janet Yellen due to speak to press after. Stocks fell across US indices as oil prices dropped to their lowest levels since November, weighing on sentiment. Overnight stocks declined in the Asian session, the weaker tone in the US and key event risk over the coming days favouring some profit taking, removing some risk from the table. While we have a quiet data calendar in Europe, focus will be on Holland as the Dutch go to the polls, thus far however sentiment remains firm and the Euro weaker against GBP, but firmer against the greenback.

GBP has rallied from yesterday’s lows, spurred on by an article in the Times this morning suggesting its shadow MPC may look to actually raise interest rates in tomorrow’s BOE meeting. Inflation certainly continues to be a concern and should the BOE look to act, then they will be catching a market off guard and GBP could well find itself 2 to 3% higher. GBPUSD based out just above key support around 1.2080/90 (1.2109 lows), we are now trading up 1.2% from there with resistance just above 1.2250 which marks the first technical retracement of the move lower from 1.2700. EURGBP has dropped back below .8700, resistance will maintain around the highs towards .8790, while a break back below .8623 will be needed to negate the bullish sentiment. Earnings and Jobless claims highlight today’s calendar, any sign that wage growth is exceeding the expected 2.4%, will favour the pound, while the unemployment rate is due to remain at 4.8%.

All eyes to the US for the evening and ahead of the FOMC we have plenty to stoke the fires, a host of major data occupies this evening session and we have to remind again that the US session is now only 4 hours ahead so much of the data coming out an hour earlier than usual. We have CPI inflation data due to show price growth at 2.7%, we also have the empire manufacturing survey and advanced retails sales for Feb also due. The FOMC announcement will be at 6.00pm (GMT), markets are priced for a rate hike, and expect a hawkish tone from the Fed. Even if they raise rates, any sign they remain cautious should see the greenback under pressure. This will likely be clear in a summary of economic projections as well as the tone from Janet Yellen as she speaks to the press. EURUSD in its higher range between 1.0600 and 1.0720, a break above 1.0720 favours progression towards 1.0832, while a break below 1.0600 targets major support at 1.0525/1.0500 area.