This morning equities, commodities and treasuries are all trading lower while the dollar continues to firm. Fed officials have been the main driver for these moves, particularly this week as they upped the ante on a March rate hike. Markets have been very slow on the up take, which is partially the Fed’s fault after last year’s 3 hike promise. Markets have now woken up to the fact that “fairly soon” may now mean less than two weeks and that perhaps this time round three hikes actual does mean three hikes. Reuters now has the probability of a rate hike in March at 74 percent, up from 30 percent at the beginning of the week. The shift in sentiment has seen the dollar index climb to seven week highs, and may have more to go if Janet Yellen and deputy Stanley Fischer stick to the same hawkish tune as their colleagues. Yields have also perked their ears up, with the 10 year 0.9 basis points higher this morning, while the 2 year note which is the most sensitive to Fed action, touched highs not seen since 2009.
Wall Street took a breather last night after the record high closes on Wednesday, as traders took an optimistic view on US President Donald Trump’s address to Congress. We however continue our weary approach here, particularly with rates now looking to be on a steady course higher. We will continue this rhetoric as long as Trump’s fiscal policies lack clarification.
In terms of data, the US will remain the key driver for markets, and as long as Yellen and Co. stick to their rhetoric that this month’s meeting is live, I don’t expect too many surprises here. Before this however, we have US ISM Non-Manufacturing for February which is expected to remain at 56.5. We also had some data from Europe this morning, with services data in Spain, Italy, France and Germany all showing firm readings. It was a slightly different story for the UK, with their services figure at 53.3, its worst reading since Sept of last year.
On the currency front, EURUSD looks set to retest the lows of last week at 1.0490, while against the pound the greenback looks set to test the 1.22 level on the back of this morning’s poor UK services reading. EURGBP broke 0.86 level this morning and if it can remain above here by the close of play, we may see it look to retest the 0.8650 area.