Sterling spike not caused by fat finger
Michael Saunders, an external Bank of England Monetary Policy Committee (MPC) member, stated that pay growth was likely to strengthen to at least 3.0% for 2018 and that there was not much slack left in the labour market. He added that, given the possibility of growth exceeding the sustainable rate of 1.5% this year, interest rates would likely need to rise further, although hikes would be limited and gradual.
Low liquidity and a stop-loss run saw GBPUSD spike nearly 1% to 1.3940 from pre-Brexit lows of 1.3835; the pair subsequently sold off back to initial levels, causing the Pound to spike to fresh 18-month highs near before a retreat to below 1.3850 as the Dollar recovered. Simultaneously the Euro dipped to four-week lows around 1.1350 against Sterling. Whilst prices were soaring, the Government secured a victory in passing the EU Withdrawal Bill onto the House of Lords.
The Royal Institution of Chartered Surveyors house-price index strengthened to 8 for December from 0 the previous month, although global factors dominated with the Pound holding above 1.3800 on market open but choppy trading persists with a slight retreat against the Euro.
US Industrial production posted a strong reading yesterday, rising 0.9% m/m with maximum possible output of the US economy increasing to 77.9% for December. Further, Apple announced its plans to repatriate billions of its overseas revenues back to its founding country which will inevitably boost Dollar sentiment.
Despite the US economy showing signs of growth towards the end of 2017 and the beginning of this year, coupled with Trump’s tax reform poised to push growth further, the Dollar surprisingly continues to trade poorly against its peers. Reasons, therefore, extend outside of the US. Cable continues its rise, peaking at 1.3934 before dropping back down to close at 1.3839 whilst the Euro traded just above the 1.2200 area for the most part.
The Euro is trading weaker this morning after European Central Bank (ECB) ‘sources’ said they are unlikely to drop the pledge to keep buying bonds at next week’s meeting. The ECB’s Villeroy argued that the recent Euro appreciation requires monitoring.
In next week’s meeting, the market expects Draghi to convey a rather dovish (preferring low interest rates to encourage economic growth) message, pointing to still weak inflationary pressure and emphasizing the disinflationary impact from a stronger Euro. The most important message to watch will be whether Draghi confirms the October statement that there will be no sudden end to Quantitative Easing.
Consumer price inflation dipped to 1.4% as expected, and core Eurozone inflation, arguably a better measure of price pressures, rose by 1.1% year-on-year, the same as in November and in October.
Traders now look forward to the German Bundesbank President Jens Weidmann’s remarks for some fresh impetus during the European trading session.
Data To Watch:
00:01 GBP RICS Housing Price Balance (Dec)
08:15 EUR German Buba President Weidmann speech
13:30 USD Housing Starts Change (Dec)
13:30 USD Building Permits (MoM) (Dec)
13:30 USD Housing Starts (MoM) (Dec)
13:30 USD Building Permits Change (Dec)
13:30 USD Initial Jobless Claims (Jan 12)
13:30 USD Continuing Jobless Claims (Jan 5)
13:30 USD Philadelphia Fed Manufacturing Survey (Jan)
14:30 EUR ECB Cœuré Speech