Market News & Insights
1 February 2018

Upbeat Fed Can’t Keep USD Afloat

The big event of the day yesterday was the last meeting for Fed Chair Janet Yellen. The USD had found itself facing selling throughout the day, right up until the 4pm fix before USD demand grew into the Fed meeting. As expected the Fed made no change to policy however the USD rose to daily highs into yesterday evening overnight the Fed changed some of their language, removing a comment on inflation remaining below 2% in the near term, further supporting their guidance of three potential rate hikes this year, as gradual hikes are supported by a stronger economy. On the day risk sentiment was slightly better than it had been for much of the week and while gains were seen across major indices, they were only moderate.

There has been plenty of back and forward on Brexit related headlines this week and the key focus for us is not to get caught up in all the noise and really concentrate on the big picture. For now, some conciliatory comments from the EU in relation to a transition period have overshadowed some of PM May’s comments on EU workers’ rights in post Brexit EU. Since we’ve kicked off the European session this morning however the USD has been on the back foot and we’ve seen some decent USD selling thus far, EURUSD is up over .5% while GBPUSD is up over .7% since we got to the desk this morning.

Is was not just removal of the inflation language that favoured a slightly more hawkish FOMC, there was also the removal of hurricane related slowdown references, as well as some acknowledgement from the language that wage inflation was picking up. All in all we would have expected to see a stronger reaction from the USD based on this language and while the dollar did trade higher into the nighttime session, it is down .4% from this morning’s highs on a weighted basis. We’ll be looking to some key data points today and manufacturing is the primary focus for data across the world today. In the US the ISM survey is expected to slow a slight slowdown through January, while ISM employment data will also be in focus with NFP data due for release tomorrow.

Better than expected house price data from Nationwide helped the GBP to an early morning rally but Manufacturing PMI data is the highlight of the morning’s releases and due to show expansion at a pace of 56.5 vs 56.3 through December. Manufacturing has been a broad improver since the Brexit vote and a stronger reading will be enough to give the pound some intraday lift, but not much more. Otherwise focus will be on government and UK headlines as usual, with some attention later this afternoon on the BOE’s Alex Brazier who speaks in London. We’re unlikely to see too much deviation from Carney’s comments earlier in the week.

Manufacturing data for the Eurozone region has already been released and helped the euro off to a strong start. Both Italian and French data were better than expected, however the German figure was slightly weaker albeit at very strong levels above 61. There will be some eyes on the ECB’s Praet as he is due to speak in Brussels, almost everything coming from an ECB has resulted in the Euro going higher, no matter what they say really. So unless Praet comments exclusively on the value of the euro, something Draghi was not concerned about at the last meeting, then EURSUD could be eyeing fresh highs above 1.2500 today.