Cheap oil, good. Low inflation, bad. Don’t ask me about “Brexit”.
As per usual, yesterday’s “Super Thursday” was not so super, with the Bank of England (BoE) keeping everything as expected and staying in “wait and see” mode for now. The only surprise was from the vote split, which saw Ian McCafferty, the rogue hawk revert to the dovish side and agree with his peers that a rate hike is not relevant right now.
Following the news Sterling lost a cent against the Dollar, but losses were capped as the rhetoric from the statement was relatively upbeat and less dovish than expected. Carney also deftly avoided speaking about the Brexit issue, stating it was a political issue where central banker comments weren’t required. If only we could do the same.
The European Commission (EC) has cut its forecast for economic growth to 1.7% from the 1.8% it had forecast in November. Government spending had been unexpectedly high because of the number of migrants arriving in Europe, which had boosted GDP. The EC also cut its inflation forecast for this year from 1.0% to 0.5%, even further below the European Central Bank’s target of about 2%. Consumer prices fell by 0.3% in 2015, largely as a result of the fall in energy prices.
Speaking yesterday morning Draghi said that he would not surrender to low inflation without stating what or when new measures would be put in place, but it was enough to attract significant safe haven flows strengthening the Euro across the board. GBPEUR opened this morning at 1.2968, 2.4% lower than Tuesday’s high of 1.3280.
There has been an incredible reversal in market sentiment this week and for once it has not been driven by either the oil price or China. The US Dollar has tumbled ahead of today’s Nonfarm Payrolls report in what is so far the worst week for the Greenback ever since the Fed hiked rates last December. Janet Yellen acknowledged that growth had decelerated by the end of 2015 and New York Fed President Bill Dudley said that financial conditions have tightened since December’s decision.
Investor optimism on the pace of future rate hikes began to fade with the January Federal Open Market Committee meeting. A poor advanced GDP reading for Q4 fueled fears among investors that they may have rushed to price in the four rate hikes suggested by the Federal Reserve last December. Poor PMI services figures heralded a USD selling spiral which remains ahead of today’s US Nonfarm Payrolls (NFP), which will be an important clue to finding out how the US domestic economy is fairing. Bear in mind the “seasonal adjustment” (upward revision) of jobs figures during the last month means we might see a lower number of jobs added this month. Such a development is likely to weigh on the Greenback as a lower than expected Nonfarm result could garner further losses across the board.
Data to watch: 13:30 US NFP. US Average hourly earnings. Unemployment rate. Trade Balance.