Fed March move expected
UK consumer lending data beat expectations with a £5.2bn increase for December, and November’s figure was revised up to the same figure which suggested consumer spending was resilient, although mortgage approvals declined. The Bank of England’s Mark Carney stated that investment was likely to strengthen in 2019 and that wage growth was moving in the right direction although not in spectacular fashion. He opined that the risks of a disorderly Brexit had eased somewhat and that, as economic slack is removed, the focus will increasingly be on returning inflation to target.
Carney’s mildly hawkish tone stimulated a Sterling push from below 1.4000 against the Dollar to a peak just above 1.4150. The Pound also pushed the Euro to near 1.1390 from a market open position of 1.1326. Sterling was notably resilient despite a generally risk-averse environment, weaker oil prices, and political uncertainty.
GfK consumer confidence also beat expectations with a rise to -9, from a four-year low of -13 in December. The BRC reported a decline in shop prices of 0.5% in the year to January as retailers continue to discount. Sterling continued to hold a firm tone with a test of 1.4200 against the Dollar on market open.
The Dollar was again on the defensive ahead of Trump’s first State of the Union speech as well as today’s Fed statement, and it remains volatile as we head into month-end.
Yesterday, consumer confidence reports improved in January to 125.4, from a reading of 123.1 in December. US President Trump’s first State of the Union proved to be a non-event overnight too. His speech was more or less a repeat of last week’s Davos comments, though he stressed the need for US Congress to sign off on a $1.5tn infrastructure plan.
The market, however, believes it is risky for the Federal Reserve (Fed) to indicate better growth prospects and more conviction on reaching the inflation target. In theory, this should confirm the recent uptrend in US yields and be supportive for the Dollar. However, of late, the Greenback had reacted very mutedly to supportive news so we look out for whether this time is different.
In tonight’s Federal Open Market Committee meeting, the market expects the Fed to leave policy rates unchanged (even though the market-implied probability of a hike is 20%), but upgrade its assessment of the economy and inflation, thereby paving the way for a March hike. Given market positioning, this could trigger a steepening of the US curve, with room for a short-term correction lower in yields at the front end.
The Euro posted strong intraday gains on the back of better-than-expected GDP data after Eurozone GDP rose 0.6% quarter-on-quarter while growing 2.7% year-on-year. Economic sentiment, however, eased off a 17-year high to 114.7 in January.
German harmonized CPI fell -0.7% month-on-month in January while rising 1.6% year-on-year, meeting consensus forecasts.
Data to watch:
09:00 EUR German Unemployment Rate & Change
09:30 EUR ECB’s Benoit Coeure
10:00 EUR European Unemployment – December, Consumer Price Index, Core CPI – January
13:15 US ADP Employment Change – January
14:45 US Chicago PMI – January
15:00 Pending Home Sales, year on year & Month on Month – December
19:00 US Fed Interest Rate Decision & Monetary Policy Statement