Markets look to be getting back to their old wise ways, where key fundamental data has more than a 10 tick move on currency pairs. This is reflective of the environment we are now trading in, with central banks dropping their negative rhetoric in favour of a tightening outlook. Since the come about of words ending in ‘exit’ markets have been driven primarily on the political front. The US for example has raised rates 5 times since the end of December 2015, yet against the euro it’s down nearly 10 percent in this timeframe. While there are several reasons why this has been the case, on the fundamental front the US’s data has been superior with the economy and equity markets holding up well under their tightening phases. This should give confidence to other central banks looking to move.
The pound has had a volatile 2 weeks, as markets went from almost fully pricing in a May rate rise, to today where it’s all but off the table. This shift in momentum started when Mark Carney told markets they may be getting ahead of themselves on the prospect of a May hike. This shifted momentum somewhat, but a deterred market still priced in a 50 percent chance of a hike. Last week’s Q1 data missed markets expectation, hitting its lowest level since Q4 2012, which resulted in GBPUSD immediately down .6% while GBPEUR was also down .5%.
Today’s attention will now turn to UK Manufacturing PMI where the sting has been taken out of the figure as a result of the above. The figure however has fallen each consecutive month since January and with markets anticipating another drop, we are in danger of falling under the 50 mark which would signal a contraction. Also this week we have plenty of political risk for UK starting with Brexit, where Cabinet ministers will hold crunch talks to try to agree the government’s preferred customs plan, with a close vote expected. Local elections this Thursday and all eyes will be on the Conservative party’s performance, a major fall in support for Tories could see rates and the pound sell off.
The US now, where tomorrow markets are anticipating the Fed to keep rates steady this week, but continue their rhetoric on its continued tightening phase with June now the most likely next date. Similar to the UK, data will be watched closely up until then, with this Friday’s Non-Farm Payroll certain to catch markets attention. With most of Europe off for May Day the euro will look to take its lead from its other pairs.