Market News & Insights
16 May 2018

Markets Focus On Inflation And Draghi

Risk off continues to dominate as concerns on growth, the North Korean peace deal, frictions in Israel/Palestine and of course Iran as well, and lets not forgot the B word closer to home. There’s plenty of geopolitical tensions that can rock the risk boat and with that riskier assets are struggling for a foot hold. The USD index is up over 1% on from the lows this week as traders continue to back the possibility that the Fed will raise rates three times this year, pushing US 10 year yields back above 3% and one of the biggest one day moves. EURUSD touched off fresh 3 months lows but still failed to drop below 1.1800, while GBPUSD dropped to the lowest levels this year, back below 1.3500 once more but unfortunately has trailed to press lower, this is the 9th time in 2 weeks this pair has tried to hold below that 1.3500 area and failed, so 1.3460 up 1.3500 is begging to put in a solid amount of support. USDJPY trying to base itself above the 110.00 mark as well. Overnight Asian markets continued the selloff in equities while thus far this morning we are looking at a mixed bag into and over the European open.

GBP had a roundabout trip yesterday, the cheerleaders were shouting about the best labour market figures and employment levels that the UK has seen for some time, a record amount of people finding employment, 179k in three months with 32.34million in employment and a rate of 75.6%. This all sounds great, but the figures are misleading in that there is very little argument. Yes it’s true to say more people are in the workforce, but most of this progress was made pre-Brexit when unemployment had fallen from 8% to 4.5%, in the post-Brexit world that decline has slowed now at 4.2%. What we have seen rise over the last 2 years is the considerable growth of zero hour contracts and part time work, so while people are “employed” according to the figures, they are in lower paid position with irregular hours. This is not the positive employment the economy needs and while some may try to paint a positive picture of the employment figures, which on the face of things looks strong, the translation back into the economy is not happening. The UK is growing at the slowest pace compared to its G7 counterparts, slower than Italy and more or less than half the rate of Germany, France, Canada and the US. There is a consistent slowdown in the UK for FDI and this is starting to show in other areas so you can shout from the roof tops about employment being fantastic, wage growth back on track, but the UK is sliding behind its direct competitors and as we stand currently, we still have absolutely no idea what’s going to happen after transition.
GBPUSD just about holding above 1.3500, we’ve seen a few attempts below now and should some USD weakness creep in later in the week there is short term scope for the pound to bounce as high as 1.3640/50 area.

We’re focused on the euro today however and ECB President Mario Draghi is scheduled to speak in Frankfurt later this morning. German CPI released this morning was as expected but the Eurozone figures are due shortly and scheduled to show a slowdown in price growth. The euro may then face some selling pressures as a result of the weaker reading and if Draghi tows the same line as the last ECB press conference then euro selling may well continue. Markets are keen to know if and by how much QE will extend beyond September, and given several ECB comments last week, markets will be keen to hear to President’s views on the time frame from QE ending to rates rising. EURGBP now sitting below .8800, the range now is .8830/50 as low as .8755, a break below there should see addition declines towards .8730.