It was a rather calm start to the week, there was nothing in terms of major data for markets to focus on and sentiment was on a stronger note after it appeared Trump had a successful weekend with Japanese Minister Shinzo Abe. Major FX flow was light through much of the day, USD finished relatively flat while the Euro faced selling and GBP was probably the strongest performer of the three ahead of today’s key CPI inflation reading. Global sentiments continued to find itself well supported with European stocks pressing higher and once again record highs seen in US indices, all the while the VIX (Volatility index), or fear index as it’s known, sits around long term lows.
The S&P actually passed $20 trillion in market cap for the first time as Trumps’ promise of tax cuts are helping to support equities for now but how exactly will all of his policies will be implemented (promised tax cuts, infrastructure spending, new health bills etc etc) remains to seen. Overnight things were slightly more downbeat, Asian markets traded lower while the USD was under some selling as the safe haven JPY was in demand.
UK CPI is expected to rise to 1.9% today and with that all eyes will be closely watching GBP’s reaction. Prices are expected to fall by -5.% through January, however anything less than the seasonal adjusted sales figure could see inflation rise above 2% for the first time since 2013. Currently this is the largest area where GBP has scope for support as its sentiment is mixed amidst Brexit turmoil and uncertainty. Should inflation continue to accelerate higher the BOE’s hand may well be forced and they might have to look at raising interest rates and todays reading will provide a good barometer of this. Only yesterday, Sonos came out saying they would be raising their UK prices by 18% as a result of the weaker pound. It important to note that a lot of pre Brexit hedges on prices (over 75% of our book) have now come off and now is where the real impact of the weaker pound will be felt on rising inflation costs. However a reading less that the 1.9% expected could well see sterling sell off quite rapidly. Key area’s to watch in GBPUSD are 1.2400 to the downside and 1.2583 to the topside. While EURGBP .8448/.8480 area remains key support for EURGBP while a break above .8648 will likely see additional upside.
Attention from the US will be on Fed Chair Janet Yellen as she speaks before the Senate banking panel, but we also have several other Fed speakers due across the wires and this may provide the dollar with some lift should they continue to support their guidance of several rate hikes this year. March is the next live meeting so any indication at all that this will be a target for the Fed will almost certainly support the USD. Our view stands, we tend to pay little attention to the individual speakers and their guidance or opinions as it’s a panel that votes, but our belief that the Fed will want a market fully convinced they will raise rates, as we saw in December 2015 and 2016. EURUSD finds support just below 1.0600, a break lower opens up additional downside.