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Oh Dollar, slippery slope

Oh Dollar, slippery slope

GBP
A Bank of England survey revealed that UK companies are planning to offer average wage increases of 3.1% in 2018, the strongest forecasts since 2008, which will maintain expectations of a slow net increase in underlying inflation. Employment agents also reported increased recruitment difficulties while growth remained modest.

Sterling failed to gain support after Foreign Secretary Boris Johnson’s Brexit speech, with markets concerned with the stability of the Conservative Party and tough EU negotiations. A breakdown in Northern Ireland government talks was also a negative factor. The Pound dipped lower against the Dollar following the US data before finding support at the 1.3800 area and rebounding strongly to around 1.4000 as the Dollar retreated sharply in choppy trading conditions. The Euro held around 1.1235 as German and UK bond yields moved higher, with higher commodity prices providing some Sterling support.

USD

Yesterday, US retail sales data fell well short of consensus forecasts with a decline of 0.3%, down from last month’s 0.2% gain. Underlying sales were unchanged with no net growth and, again, below the expected 0.5% growth.

On the upside for the Dollar, the weak retail sales data was covered up by inflation data. Consumer prices rose 0.5% compared to an expected 0.3% gain. Year-on-year CPI data held at 2.1%, beating forecasts of a 1.9% gain. Causes for the boost in headline data can be seen in the strength of energy prices and services sector. Finally, core CPI data held at 1.8%, again above forecasts of 1.7%.

Further, shivers were sent through the global equity market as the Dollar was dumped, with concerns over higher inflation and US budget deficits, sending US treasury yield to a four-year high of 2.92%.

As a result, futures markets rate hike cycle predictions for a March rate increased to 88% where chances of four rate increases for the year were sent to around 23%. Cable was sent above the 1.4000 barrier as a result of yesterday whilst, against the Euro, levels reside around mid-1.2400s.

EUR

The Euro somewhat underperformed given the solid Q4 economic data seen yesterday, potentially pointing to high market expectations.

The EURUSD is trading up 0.35% at around 1.2510 against the US Dollar after taking an unexpected boost from the US equity markets rise. European markets gave a thumbs-up to German and Eurozone GDP reports. Both indicators showed respectable gains of 0.6% in the fourth quarter. On an annual basis, Eurozone GDP was up by 2.7%, underscoring the strong rebound in the Eurozone economy in 2017.

Heading into Europe, we have little of note in terms of macro news to be reported except for the Eurozone trade balance figures.

Data to Watch:

00:30 AUD Employment Change s.a. (Jan)
00:30 AUD Unemployment Rate s.a. (Jan)
08:15 EUR ECB’s Mersch speech
10:45 EUR ECB’s Praet Speech
12:00 EUR ECB’s Lautenschläger Speech
13:30 USD Initial Jobless Claims (Feb 9)
13:30 USD Continuing Jobless Claims (Feb 2)
13:30 USD Philadelphia Fed Manufacturing Survey (Feb)
13:30 USD Philadelphia Fed Manufacturing Survey (Feb)
14:15 USD Capacity Utilization (Jan)

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