It has been one of the most interesting few weeks in markets I can recall, certainly since 2007/8. From the aspect of a market participant especially in currencies, there has been so much happening, so many big themes developing, and so many drivers all occurring and all coinciding at the same time. Markets are reacting to technical positioning, fundamental data and geo-political concerns throughout the day, compacting it all into a morning commentary is almost becoming a challenge with so many moving parts (if anyone wants a specific outlook on a currency pair please do not hesitate to contact us) but it is edge of your seat stuff watching it all unfold. Broadly speaking, risk was positive in Europe yesterday as solid earnings helped buck a three day losing streak, Euro and GBP were both stronger on the back of better data while in the US the greenback recovered through the day before selling off post FOMC and again into this morning. US equities were similar to Europe, only a slight gain posted however, as sentiment shifted lower overnight with a stronger JPY driving the Nikkei lower.
Let’s take a look stateside first as that continues to be my first port of call for global market drivers, with Trump and the FOMC in focus again yesterday. The latter kept rates on hold and their wording had changed little from the December meeting a while I’ve seen a mixed interpretations, some suggesting hawkish, some suggesting dovish, I felt the subtle changes in wording around certain issues was a more cautious approach from the Fed and on the dovish side. The Fed remain ready to raise rates but conditions will have to warrant and while inflation appears to be on the rise, the statement felt less gung-ho, especially for a market looking for indications that rates will rise. We continue to feel that if the Fed are to raise rates, they will want the market fully informed and positioned in advance, certainly not the case currently. The USD had been enjoying a day on the rise as positioning for a hawkish Fed was met with some strong data points, the ADP employment report saw 246k jobs added to the economy vs just 168 expected, while US manufacturing also grew faster than expected with the ISM rising to 56.0 vs 55.0 expected. The positivity did not last long however as the USD began to sell off post FOMC, the USD index now trading at 12 week lows with EURUSD touching 1.0800 this morning and 1.2700 trading in GBPUSD. Attention will now be on tomorrows NFP’s, but Trump and the strong USD unwind seem to be the biggest risk to USD downside for now.
It was to be “Super Thursday” in the UK, but yesterday we received news that today, UK PM Theresa May would be releasing a white paper setting out her Brexit plans, so combined with the BOE’s decision as well as the BOE’s quarterly inflation report, I’ve now dubbed this wave of information, “Tsunami Thursday”. The big question for all of this is what will happen to the pound? We expect the BOE to remain on hold with no change to their policy for now but inflation is key here and we expect to see an upward revision of inflation expectations from the BOE. A quick analysis of our books shows that almost 82% of our clients, who held pre-Brexit hedges for GBP, have since expired. This now leaves them exposed to the newly depreciated levels of GBP and this in turn transfer through to price pressures for producers, manufacturers and in turn the consumer. Yesterday’s manufacturing PMI from the UK was as expected, but within the data we saw the highest prices paid since records began, over 25 years ago. GBPUSD may look to test above post flash crash highs at 1.2775, with sellers lined up to 1.2880 however progression above there may be limited and I expect we are nearing the peak of GBP strength at current levels. While GBPUSD will only look bearish below 1.2440 for me, a retracement is likely. EURGBP is testing back below .8500 area, but again we need to see a break below .8300 area should we expect to see further downside in the pair. For now however, .8460/80 area will provide Euro buyers some opportunity, a drop below and the recent lows will be tested.