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Dovish Draghi to add to Doughy Dollar

Dovish Draghi to add to Doughy Dollar

GBP
As expected, the UK unemployment rate held at 4.3% in the three months to December and employment increased to a record high. January claimant count data recorded an increase of 8,600 and December’s figure was revised up to 12,200. Average earnings growth was also in line with expectations, held at 2.5% including bonuses and up 0.1% to 2.4% excluding bonuses. The data strengthened expectations of a gradual rise in earnings growth, underpinning Sterling sentiment, and UK bond yields moved higher.

Dollar weakness was the main feature but markets remained more optimistic on Brexit outcome and Sterling surged higher. The Pound initially pushed above 1.4100 and gains accelerated in US trading with a break for 1.4250. The trend continued in the early hours of this morning with Sterling peaking at highs around 1.4325 before a correction.

USD

Treasury Secretary Mnuchin stated that a weaker US Dollar is good for trade, causing sustained pressure for the Dollar in European trading hours. Speculation increased that the Trump Administration would push for a weaker US currency as a weapon in the global trade battle. Further speculation of a move away from the notional strong Dollar policy and reinforced negative Dollar sentiment. The trade-weighted index dipped to fresh three-year lows with the Euro initially pushing to the 1.2350 area.

January’s PMI manufacturing index strengthened to 55.5 from 55.1 previously and the strongest level for close to three years. Although there was a retreat in the services-sector index to a nine-month low of 53.3, business confidence strengthened and the rate of price increases accelerated. Existing home sales declined to an annualised rate of 5.57 million for December. Data releases overall were solid, but not strong enough to reverse the overwhelming tide of negative Dollar sentiment following Mnuchin’s comments.

EUR

The Eurozone PMI manufacturing index declined slightly to 59.6 for January from 60.6 while the services sector index strengthened to 57.6 from 56.6, the strongest reading for over 10 years. Both input costs and selling prices recorded the fastest rate of increase since April 2011, reinforcing expectations of higher inflation. Eurozone data maintained confidence in the outlook and increased speculation that the European Central Bank (ECB) would find it difficult to justify dovish rhetoric.

The ECB Rate Decision today will be closely watched by market traders and investors. Speculations have risen that Draghi will change the language of his rhetorics on forward guidance. The strength of the Euro currently is something Draghi will not want given the slow appreciation of inflation to the 2% target and therefore a shift in focus from asset purchases. The hawks (someone who favours high interest rates to control inflation) of the ECB would have been pleased with the Euro rally at the beginning of the year but the strength could cause a delay in the announcement of quantitative easing until the March meeting. Therefore, we would expect the ECB President to say whatever is necessary to weaken the Euro in attempt to get closer to its inflation target.

Data To Watch:

07:00 EUR Gfk Consumer Confidence Survey (Feb)
09:00 EUR IFO – Business Climate (Jan)
09:00 EUR IFO – Business Climate (Jan)
09:00 EUR IFO – Expectations (Jan)
12:45 EUR ECB Interest Rate Decision
12:45 EUR ECB Deposit Rate Decision
13:30 USD Continuing Jobless Claims (Jan 12)
13:30 USD Initial Jobless Claims (Jan 19)
13:30 EUR ECB Monetary policy statement and press conference
15:00 USD New Home Sales (MoM) (Dec)
15:00 USD New Home Sales Change (MoM) (Dec)

 

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