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The 2018 Euro surge starting to slow

The 2018 Euro surge starting to slow

GBP
January’s UK mortgage lending printed stronger than expected, approvals increased to 40,100 from 36,100 in December, although annually there was still a significant decline. Further, from the same data from UK Finance reported the first decline in annual consumer credit; the series started in April 2017.

Sterling continued to gain some support from hawkish rhetoric from Bank of England Deputy Governor Ramsden over the weekend and further speculation over a May rate hike. Initial Sterling support, based on hopes of a favourable Brexit deal, faded later in the session with fading confidence and the Pound failed to hold 1.4000 against the Dollar.

Markets will be wary of choppy trading surrounding month-end position adjustment with the potential for some Sterling selling. Although the latest CFTC data recorded a decline in long speculative Sterling positions to the lowest level since early December, which should limit the potential for fresh selling, the Euro strengthened further to the 1.1325 area on market open.

USD

The USD index, which tracks the Dollar against its main competitor currencies, is extending the negative tone at the beginning of the week amidst a soft performance of yields in the US money markets and rising expectations on the upcoming testimony by Chairman Jerome Powell. In fact, USD remains sidelined with yields of the key US 10-year around the 2.86%, or 10 bps lower than last week’s multi-year peaks in the 2.96% neighbourhood.

The Dollar should remain stable as the focus this week is on the personal consumption expenditure data, which is the Federal Reserve’s (Fed) preferred measure of inflation. This will be key as we head towards the FOMC decision next month, where it is highly likely that they will raise interest rates by another 25bps. It is worth mentioning that the debate between 3 or 4 rate hikes this year remains well and sound, with the probability of the first move on rates next month at more than 87%, according to CME Group’s FedWatch tool.

Other than Powell’s testimony, the US calendar today includes trade balance figures and Durable Goods Orders for the month of January and Consumer Confidence measured by the Conference Board during February.

EUR

The rise of the Euro that we have seen since the beginning of 2018 is starting to dwindle. European Central Bank (ECB) President Draghi stated in his speech yesterday how the economy has grown above expectations and made comments on how inflation has yet to show convincing signs. Draghi further stated uncertainty surrounding the measurement of economic slack could be greater than initially thought.

These cautious comments on inflation pushed the Euro to below 1.2300 against the Dollar before making a recovery later in the afternoon. The Euro also fell against the Pound and closed at 1.1339.

Political uncertainty proves to be a limiting factor for the Euro again as Angela Merkel wins her CDU/CSU party approval to renew coalition talks with the SPD party once more – talks take place on Sunday. Further, the Italian parliamentary election will take place on the same day.

German employment data is due today as well as inflation data for Europe, where the headline figure is expected to be 1.3%, way off from the ECB’s target of just below 2% over the medium term, will be a key indicator of Draghi’s speech yesterday.

Data to Watch:

08:40 EUR ECB’s Mersch speech
10:00 EUR German Buba President Weidmann speech
10:00 EUR Industrial Confidence (Feb)
10:00 EUR Economic Sentiment Indicator (Feb)
10:00 EUR Business Climate (Feb)
10:00 EUR Consumer Confidence (Feb)
10:00 EUR Services Sentiment (Feb)
13:00 EUR Harmonised Index of Consumer Prices (YoY) (Feb)
13:30 USD Fed’s Powell Speech
13:30 USD Durable Goods Orders (Jan)
13:30 USD Durable Goods Orders ex Transportation (Jan)
14:00 USD S&P/Case-Shiller Home Price Indices (YoY) (Dec)
14:00 USD Housing Price Index (MoM) (Dec)

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