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GBP/USD hits highest level since the day after the EU referendum in June 2016. USD still struggling around 14-week lows.

By Nick Parsons

The pound got off to a very good start to the New Year 2018 yesterday, second only to the buoyant Canadian Dollar on the one-day performance table. Against a very weak US Dollar it reached an intra-day high of 1.3594 which matched its high for 2017 reached back in mid-September. Overnight in Asia it has extended its gains further to reach USD1.3608; its highest since the day after the EU referendum back in June 2016.

This impressive price action comes against a backdrop of a slightly softer than expected manufacturing PMI report which printed at 56.3 in December; well down from November’s 51-month high of 58.2. Although December saw rates of expansion in output, new orders and employment slow from November’s highs, growth in all three components remained solid and well above long-run trends. And, despite the uncertainties of Brexit, the headline PMI has now remained above the 50.0 no-change mark for 17 consecutive months.

On the inflation front – which will be crucial for the Bank of England’s Monetary Policy Committee in 2018 – Markit reported the rate of increase in input costs eased to a 4-month low in December, but remained marked overall. Companies linked higher costs to rising raw material prices, input shortages, suppliers raising their prices and the exchange rate. The cost of chemicals, electrical goods, electronics, metals, paper, plastics, timber and utilities were all reported as higher.

Part of the increase in purchase prices was passed on in the form of higher output charges in December. Selling prices rose for the twentieth successive month with companies linking the latest increase in charges to stronger demand.

Ahead of the construction PMI today and the service sector PMI index on Thursday, the GBP opens in Europe this morning at USD1.3600 with GBP/AUD at 1.7395 and GBP/NZD1.9170.

The US Dollar remains friendless and after two weeks of near-relentless losses into year-end, it has kicked off 2018 with further losses. Its index against a basket of major currencies opened yesterday around 91.90 and fell all the way to 91.44 by mid-morning in Europe before rallying very slightly to close in New York around 91.52. This is barely half a point above the 2017 low back on September 5th.

Once again, the USD weakness came despite a rally in the stock market which saw the S+P 500 and NASDAQ indices make fresh intra-day and closing record highs and the NASDAQ close above 7,000 for the first time in history. It also comes despite higher bond yields at all points along the maturity spectrum and a very solid set of economic data.

Markit’s version of the manufacturing PMI index rose from 53.9 in November to 55.1 last month. They noted that the latest upturn was supported by faster increases in output and new orders, amid reports of greater client demand. In line with stronger production growth, employment rose further and at the fastest pace since September 2014. Backlogs meanwhile increased at the quickest rate since October 2015 to indicate ongoing capacity pressures. Supply chain delays and increased global demand for inputs pushed costs up further, with the rate of cost inflation remaining sharp overall. The latest index reading was the highest since March 2015 and “signaled a solid improvement in the health of the sector”.

For the moment, it seems just that the dollar is falling because it is falling. The technical tail is wagging the fundamental dog. When price action itself is such a dominant feature of trading, investors seek confirmation of the prevailing trend by seeking out the bits of news which support a continuation of the move rather than viewing the incoming information more objectively. Of course, we’ve been here before and a year ago it happened in precisely the opposite direction. All the news was interpreted as dollar bullish post the 2016 Presidential elections and it rose until January 3rd last year. Here we are on that same date, with sentiment arguably as bearish today as it was bullish then…

The US Dollar index opens in Europe this morning at a close to 14-week low of 91.50. This afternoon brings the ISM manufacturing PMI report and then the Minutes of the December FOMC meeting at which rates were hiked 25bp.


After a year in which the euro was the best performing of all the major currencies, it got off to a flying start in 2018; with a high in Europe yesterday morning of 1.2077; the highest in over 3 years. It couldn’t sustain its very positive momentum throughout the day, however, and finished in New York around 20 pips below its best level.

Certainly, there was nothing wrong with the economic data. Final December PMI’s for Germany, France and the Eurozone were released alongside all the individual countries which don’t produce ‘flash’ PMI’s around 10 days before the end of the month. Strong rates of expansion in output, new orders and employment pushed the final IHS Markit Eurozone Manufacturing PMI® to 60.6 in December, its best level since the survey began in mid-1997. The PMI was up from 60.1 in November and identical to the earlier flash estimate.

National data signalled further broad-based growth, with business conditions improving across all of the countries covered. PMI readings were at survey record highs in Austria, Germany and Ireland, and remained close to November’s series peak in the Netherlands. Rates of expansion in France and Greece were the fastest for over 17 and nine years respectively. Growth also remained robust, albeit slower, in Italy and Spain.

On this second trading day of 2018, the EUR opens in Europe at USD1.2050 and GBP/EUR1.1285. Germany’s December unemployment figures are published this morning but otherwise, it’s a quiet day for economic data ahead of tomorrows PMI services reports.

With the US Dollar remaining under pressure and gold hitting its highest level since September 18th at $1312/oz, the AUD met with reasonable investor demand on the first trading day of 2018. It rose against the USD and NZD, fell a little against the EUR and somewhat more against the CAD and GBP. AUD/USD reached a high in the London morning of 0.7842; its highest since October 20th and taking its gains since the recent low on December 8th to almost 340 pips.

For a currency which is linked to the performance of industrial and precious metals like no other, the price of gold recently is starting to draw lots of investor attention. Gold futures have risen for 12 of the last 13 days and are up for the last 8 in a row; the longest winning streak since 2011. Taking a longer perspective, gold has risen in January for 9 of the last 12 years with an average gain of just over 4%. The spot price is now above all of its 20, 50,100 and 200 day moving averages and with President Trump now taking to Twitter to boast about the size of his big red nuclear button, traders who have been watching the meteoric rise of Bitcoin over the last few months are turning to a safe haven which at least they feel they understand and have access to in their regular dealing accounts.

There are no local economic data released today, with the performance of services index on Thursday and the more important November trade figures on Friday morning. The AUD opens in Europe this morning at USD0.7820 with AUD/NZD at 1.1015 and GBP/AUD1.7395.

The Canadian Dollar continued its recent very strong run yesterday and once again finished at the top of the one-day FX performance table, hitting USD1.2500 (or 80 US cents when quoted the other way round) for the first time since October 20th.

Crude oil on NYMEX has held above $60 ever since last Friday as the cold weather intensifies across North America. Winter Storm Grayson, a very large and powerful weather system is threatening the East Coast of the United States with heavy snow, intense winds, and record-setting low temperatures. The cold front has sent temperatures below freezing in more than 92% of the Continental United States. Winter storm watches and warnings have been issued for many coastal regions in north Florida to Maine from Wednesday into late Thursday. Hurricane-force wind warnings, meantime, have been posted off the coast of North Carolina where ships could encounter winds of 80 miles an hour and waves as high as 26 feet on Thursday.

As well as oil prices, there is some speculation that the Bank of Canada might pull the trigger on another interest rate hike at its January 17th meeting. Markets are currently pricing in about a 45% chance Stephen Poloz will increase the benchmark rate to 1.25 per cent at that meeting and the Governor has previously warned that monetary policy needs to have an element of surprise if it is to be most effective.

The really big test for the CAD will come with December’s employment report on Friday. Before then, the Canadian Dollar opens in Europe this morning at a 10-week low (CAD stronger) of USD1.2510 with GBP/CAD at 1.7025.

As the Aussie Dollar has surged over the past few weeks, the New Zealand Dollar has done pretty well to generally keep up with the pace. For sure, the AUD/NZD cross has risen from 1.0870 back on December 13th to 1.1015 which signals some modest NZD under-performance but NZD/USD has spent much of the first 24 hours of 2018 on a US 71 cents big figure, reaching a high in the London morning yesterday of 0.7125.

The Kiwi Dollar didn’t move much after the first Global Dairy Trade auction of 2018 which saw the overall index rise 2.2%, but some big swings for individual markets. Butter milk powder (BMP) took a sharp decrease by 7.3%, having not been on offer at the previous event whilst whole milk powder (WMP) on the other hand rose by 4.2%.

After a very strong run recently, however, the NZD may need the support of improving macroeconomic data both at home, in China and the broader APEC region if its recent gains are to be sustained. There’s no domestic economic data scheduled for release until January 9th, however, and if the USD shows any sign of a turnaround, the NZD could be vulnerable to a bout of profit-taking from recently-acquired long positions.

The New Zealand Dollar opens in Europe this morning at USD0.7100 with GBP/NZD at 1.9165.