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Negativity priced out

Negativity priced out


UK construction PMI contracted to 49.2 in January, well below forecasts of 53.0 and the lowest since last May as civil and commercial activity fell. Following the release Sterling retreated to 1.3565 against the Dollar. The Bank of England unanimously voted to make no policy changes; interest rates remain at 0.1% and total asset purchases at £895bn. Despite the bank now forecasting a 4.2% GDP contraction in Q1, downgraded from modest growth at the last meeting, a powerful recovery later in the year is still expected. Governor Bailey played down the potential for the introduction of negative interest rates, showing little enthusiasm for the idea and ruling out any such move for at least six months. 

The expectations of a strong economic recovery and reduced expectations of negative rates triggered a sharp Pound rally as the markets priced out the potential for any move this year. The Euro dipped sharply to lows near 1.1430 while the UK currency recovered to above 1.3650 against the Dollar. This morning Sterling opens near 1.3680 to the Dollar and 1.1435 to the Euro.



US initial jobless claims declined to 779,000 in the latest week from a downwardly-revised 812,000 previously and below consensus forecasts of 830,000. Continuing claims also declined to 4.59mn from 4.79mn previously. There was also a decline in the numbers claiming pandemic assistance which provided some relief and maintained a more optimistic stance towards the monthly jobs data on Friday. Consensus forecasts are for an increase in non-farm payrolls of around 85,000 for the month with the unemployment rate unchanged at 6.7%. Strong data would increase confidence in US out-performance.

Kansas City Federal Reserve (Fed) President George stated that financial stability is an essential condition for Fed goals which suggested reservations over a prolonged period of very low interest rates, although St Louis head Bullard considered that there were no financial stability risks at present.

The dollar overall strengthened to fresh 2-month highs.



The Euro options market positioning looks stacked against the single currency with three-month risk reversals showing the strongest bearish bias since June 2020. Technical charts and macro factors also look to have aligned in favour of the bears.

Against the Dollar, the single currency settled near the 1.1960 area, finding some support near monthly lows heading into the Asian session. The pair now seems to have entered a bearish consolidation phase with Investors moving onto the sidelines and awaiting the US Non-Farm Payroll data for fresh directional impetus. 


Data to watch

08:30 – GBP – BOE Gov Bailey Speaks 

08:30 – USD – Average Hourly Earnings 

08:30 – USD – Non-Farm Employment Change 

08:30 – USD – Unemployment rate

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