While some markets returned to the battle ground yesterday, today is the official return and one thing is almost guaranteed, that 2017 will provide just as much volatility and risk events as 2016, if not potentially more. However, there is no doubting markets across the globe ended 2016 on a high with US stocks posting record levels while the USD index closed at 14 year highs. European stocks also rallied into the year-end while this morning the UK’s FTSE breached record levels just after the open. The Euro finds itself under pressure as the region remains gripped by low inflation, while its closest counterparts in the USD and GBP are both trading firmer, the USD on the basis that the Fed will look to raise rates by a further 75bps this year, while in the UK rapidly rising inflation and a steady economy have put hold to the expectation the BOE will be cutting rates or increasing accommodation anytime soon, certainly not until we see the impact of Article 50. There will also be eyes pointing east as we watch China, who have been actively devaluing their currency, CNH, which hit record lows as the world rang in the New Year.
There are several key areas for development that we will be closely watching through 2017 and the political environment is one. Donald Trump will take the reins in the US in three short weeks and while we have seen the USD and US markets rally considerably since his election, there still remains many questions over his ability as the leader of the powerhouse that is the US. In the UK the Brexit train will continue, whether PM May can get an exit plan in place by the end of Q1 (as she previously suggested) remains to be seen, but the UK will not be going back and as such uncertainty will still play its part in UK economics through 2017. Geopolitical concerns are also to the fore, and with several notable conflicts as well as a number of perceived aggressive moves from Russia towards the US/Europe/Turkey/NATO and ongoing trouble in Syria/Iraq and across the Middle East. These are just some major areas to keep an eye on for global shocks, otherwise our attention, as always will be focused on the data points that shape our views.
With that in mind we look at today’s figures and the Euro started the day slightly weaker ahead of unemployment figures from Germany, unemployment for December remained as expected at 6% however a fall of some 17k in unemployment numbers has helped the Euro off the morning’s lows. CPI data due later this afternoon will likely get a greater reaction from markets, analysts expect to see year on year price growth of 1.4% vs .8% previously. This may well provide the Euro some lift and it needs it as it currently sits just above recent lows. EURUSD continues to find bids below 1.0400 down towards 1.0352 lows, while any rally higher will likely run into sellers towards 1.0520, with more lines up above around the 1.0670 area. EURGBP has near term support towards .8490, while moves above .8600 will find sellers emerge. A break below .8490 should favour progression lower towards the .8400 area.
There is plenty of data from the US this afternoon as well which should see the USD take some interest. The USD continues to sit above 13 years highs (on an index basis) and for us looks over valued, especially as market is pricing in a rapid bout of rate increases for the US this year, based on Fed rhetoric. The issue is we’ve seen all this before from the Fed, and while sentiment is positive and data has been more consistent, it still sits below levels we would expected to absorb 75bps in rate hikes. So we’ll need to see a considerable pick up in US data in order to continue to support this hawkish rhetoric. First up today will be ISM manufacturing and Markit PMI manufacturing data. GBPUSD has support towards 1.2200, with larger support sub 1.2100, while any rallies will likely find sellers emerge towards 1.2400 area.