Market News & Insights
26 January 2017

Will Real Data Revive the USD?

Risk appetite is enjoying a revival this week, in Europe some better earnings release and a positive sentiment environment helped the Stoxx 600 to its biggest one day gain in almost 11 weeks while in Germany the DAX traded to its highest level since May 2015 despite some weaker IFO reports from Germany. In the UK however it was a different story as the surging pound helped keep the FTSE pinned lower. GBP has rallied for 10 of the last 11 trading session, an impressive performance given we’ve fundamentally seen little data change, and Brexit and Article 50 is far from a settled affair. GBP currently enjoying a revival in sentiment, this is unlikely to last however as we really need to see some clear Brexit plans before we can rule out additional GBP weakness. The USD struggled for momentum, any rallies throughout the day for the greenback quickly ran into sellers but the dollar may get some respite today with the first bit of any meaningful data this week due across the wires. US equities continue to press record highs with the Dow breaking above the psychological 20,000 level, the figure itself means very little but press like to focus on round numbers for headlines and after waiting for the break we all finally got it. The Trump effect is in full swing once more. Interestingly however the VIX index, a measure of market volatility, also known as the “fear index” is at a 2.5 year low as markets press these record levels. Some might call this complacency, especially given the world’s apparent shifting political scene, with Trump and his protectionist policies and the potential disintegration of the EU, with Russia casually poking the western world for vulnerabilities within their union.

It has been an impressive run for GBP but for our eyes very little has changed and there remains huge risk to the pound in the coming months. We argued two weeks ago GBP was undervalued given the current state of play and now we feel the pound is approaching its highs, as downside risks remain just around the corner, and one errant headline on Brexit can send GBP plummeting. That being said we are never one to look a gift horse in the month and after an 11 day bull run, GBP pairs are offering excellent levels to place some cover to sell GBP, especially as GBPUSD approaches 1.2700/2800 area and 5 months highs, while EURGBP is currently under downside pressure from the sterling strength. A break below several key levels in EURGBP now finds the pair looking back towards .8450 support (Jan 3rd low), with major support towards .8315 now really in focus once more. .8530 should hold any moves higher for now and only a break back above .8600 negates the bearish view here. Pm May travels to the US today to meet with Donald Trump, so anything could happen really but big development outside of lip service are unlikely. GDP and index of services headline UK data, a slight slowdown to .5% growth from .6% growth is expected.

We finally have some decent data points to take our focus away from political ramblings and this may well give USD some respite as the greenback tries to recover from 7 week lows. USD has struggled for much of the month as focus turns to Trumps polices and their impact on the dollar but today we look back to the fundamental drivers of the economy and the data points that will help guide the Fed on their policy. While many still see several rates hikes this year, we’ve argued the US needs to show almost perfect data to convince markets. Today we have the Advance Goods trade balance, Jobless claims, Markit Services PMI figures as well as the composite reading, as well as home sales figures. Broadly they paint a good picture of the health of the US economy and may well help boost the USD off lows should figures support the hawkish tone the fed have been taking.