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GBP and EUR steady after last week’s surge. Eurozone and UK CPI data due this week. US markets closed for Martin Luther King day.

By Nick Parsons

The Pound starts the week after an enormous swing from Thursday’s low to Friday’s close and one of the biggest daily rallies in recent memory. By late morning on Thursday, GBP/USD was at a fresh 2018 low of 1.3462 with GBP/AUD down at 1.7110. As the ECB dropped the bombshell about changing its language around forward guidance, the EUR soared and the USD tumbled, with GBP/USD moving higher in its wake. Having ended Thursday at USD1.3550, Friday saw a surge of almost 2 cents with no domestic UK news of any kind: neither economic nor political. Instead, as the USD fell back, the co-called ‘cable’ rate breached the post-referendum high of USD1.3590 seen on September 15th 2017 and triggered a huge wave of buy orders which took the pound up to a high of USD1.3740, GBP/AUD1.7345 and GBP/NZD1.8920. Overnight in Asia it has moved another 25 pips higher against the USD but is around half a cent lower against the Australian Dollar.

For the week ahead, the first point of interest will be to see if the annual rate of inflation might have peaked. The Consumer Prices Index (CPI) 12-month rate was 3.1% in November 2017, up from 3.0% in October 2017; it was last higher in March 2012. The consensus for December is that the annual rate might slip back a tenth to 3.0% as seasonal promotions and discounting at Christmas offset a continued increase in petrol prices. On Friday, we’ll find out what impact rising prices may have had on the volume of goods sold. Retail sales are expected to have fallen around -0.6% m/m after a +1.1% m/m surge in November helped by promotions such as Black Friday.

Bank of England MPC member Tenreyro is due to give a speech this evening on the causes and implications of low productivity but are no other economic statistics due today. The pound opens in London this morning at USD1.3740, AUD1.7290 and NZD1.8900.

The US Dollar begins this Monday after a very bad week. Its index against a basket of major currencies was pushed down through two very important technical levels. Not only did it make a fresh low for 2018 on the move below 91.50, but it broke below last year’s September 7th low of 91.00; taking the index down to its lowest level in more than 3 years at 90.50. We have to go right back to December 2014 to see the last time the Dollar Index was below 91.0.

Perhaps the only thing we can be sure of today is that the US cash equity market will not make another fresh high. This isn’t a prediction based on investor sentiment, corporate news or economic data. Rather, it’s just because the US stock and bond markets are closed for the observance of Martin Luther King Day.

A cynic might note that incoming economic data have had such little effect on the US equity market or the US Dollar recently that index futures and currency markets will simply not notice the absence of either fresh economic data or the underlying cash equity market. Certainly, there was nothing in Friday’s numbers – core CPI greater than expected and a stronger than consensus retail sales report – that would have knocked the Fed off its tightening bias or suggested that growth expectations needed to be revised lower.

Later in the week we’ll see manufacturing and industrial production on Wednesday, and a number of regional reports such as the Empire State survey on Tuesday and the Philly Fed survey on Thursday. Sandwiched between these is the latest Federal Reserve Beige Book on Wednesday afternoon New York time.

The US Dollar index opens in London at 90.44 whilst US 10-year bonds are steady at 2.55%.


The last seven days have shown just how dramatic foreign exchange markets can sometimes be. On Tuesday morning the euro was down to a 2018 low just below USD1.1920 after German chancellor Angela Merkel said it would be “an enormous challenge” to bridge political divisions within her own Christian Democrats and with the left-wing SPD in order to re- create the coalition that ran the country from 2013 to 2017. By Thursday morning the EUR still stood at USD1.1940; trapped between the opposing forces of strong economic news and political uncertainty.

It was then that the ECB dropped its bombshell on financial markets about the need to change its language on forward guidance of monetary policy. The interest rate market was not fully pricing an ECB rate hike until early 2019. But, as the ECB said it will need to alter its guidance, then the FX and interest rate markets jumped to the logical conclusion that this is the precursor to a shift in ECB interest rate policy. Hence, the EUR jumped from USD1.1940 to a high of 1.2050. With none of the usual push-back from anonymous ‘sources’ on Friday, the EUR further surged to a high of 1.2155; the highest in more than 3 years.

On Wednesday this week we’ll see the Eurozone’s final December CPI figures whilst ECB Council Member and Bundesbank President Jens Weidmann is speaking along with his colleague Benoit Coeure at an IMF conference on Thursday.

An ‘ECB sources’ story could still come at any time, although its impact now will be less powerful than if it had appeared last Friday. The EUR opens in Europe this morning at USD1.2210 and GBP/EUR1.1250.

It was a pretty wild week for nearly all the world’s major currencies, the one exception to this being the Australian Dollar. Indeed, AUD/USD remained on the same 78 cents ‘big figure’ for all but the very last two hours of trading on Friday evening. Its range for the past week was from a low of USD0.7807 on Tuesday to a high of 0.7922 just before the close in New York on Friday evening. This morning in Asia it has extended gains to just over 0.7950 has gold continues its very strong performance.

The yellow metal began last week at $1318 per ounce and after dipping to $1309 on Wednesday, it then rose persistently and virtually without correction up to a high of $1337 on Friday; the highest since September 10th 2017, whilst silver, platinum and aluminium all registered weekly gains. Today, gold has added another $5 to $1342.

For the week ahead as people drift back to work after the holidays, the big number to watch will be Thursday’s employment report. Consensus expectations are for a 15,000 increase in December employment after a huge 61,600 increase in November. Last time around, full-time employment increased 41,900 to 8,501,900 and part-time employment increased 19,700 to 3,901,100 although the unemployment rate remained steady at 5.4%. It is generally estimated that, over time, around 14-15k new jobs per month are enough to keep pace with demographic change and leave the unemployment rate steady though this doesn’t always hold for every individual month’s data. Ahead of this, we’ll get to see Westpac’s index of consumer confidence on Wednesday and figures on new motor vehicle sales tomorrow.

The AUD opens in Europe this morning at USD0.7945 with GBP/AUD at 1.7285.

The Canadian Dollar is the only major currency which has fallen against the US Dollar over the past seven days. Having opened last Monday morning at USD/CAD1.2400, and been much higher (CAD weaker) in the meantime as investors began to question whether a rate hike at this Wednesday’s BoC monetary policy meeting really is nailed-on, it sits this morning at USD/CAD1.2445.

A report last Wednesday, citing two government sources, said that Canada is increasingly convinced that President Donald Trump will soon announce the United States intends to pull out of NAFTA. President Trump has long called the 1994 treaty a bad deal that hurts American workers and during the presidential campaign, called it the "worst trade deal in the history of the country." USD/CAD jumped to a high of 1.2575.

Even after the weekend, investors are still none the wiser as to what the US’s true intentions are and what economic impact it may have either side of the Canada-US border. Officials are due to hold a sixth and penultimate round of negotiations in Montreal from January 23-28th and it is now widely expected that Mr Trump might deliver a letter giving 6-months’ notice of an intention to withdraw from the agreement. The only official comment from the White House is that, “there has been no change in the president’s position on NAFTA” and Mr Trump’s attention has instead been focused on damage repair after some intemperate comments about other foreign countries.

Amidst all the continued uncertainty, the Canadian Dollar opens in London this morning at USD1.2445 and GBP/CAD1.7110.

This last week saw a quite remarkable performance from the New Zealand Dollar. By the close of business in New York on Thursday, the flightless bird had been the strongest performer of the day for five of the previous six trading days. On Friday, it plunged to bottom spot, falling a huge 260 pips against the GBP, 65 pips against the EUR and even losing 20 pips against a very weak US Dollar. We warned a week ago about a pick-up in volatility for the NZD but this was almost off the scale. Since the start of 2018, NZD/USD is up almost 2 cents to 0.7275, whilst measured from the November 8th low, the gain is almost 5 cents.

Perhaps the most surprising feature of the Kiwi’s performance was that it came in the almost total absence of any fresh economic or political news. As the peak holiday season now begins to wind down, though, we’ll this week start to see some fresh incoming data. The main number to watch this week is probably the Quarterly Survey of Business Optimism. The New Zealand Institute of Economic Research (NZIER) has conducted a comprehensive quarterly survey of business opinion — known as the QSBO — since 1961. This survey asks respondent businesses a range of questions about their output, costs and prices, and employment and investment intentions. It also measures their perceptions of general business conditions. The survey data are widely used as indicators for assessing various aspects of New Zealand’s macro-economy.

Ahead of the QSBO, this Monday morning brought the monthly gauge of food prices. These are closely watched because, as in Australia, New Zealand only calculates CPI inflation on a quarterly basis and food makes up almost a fifth of consumer prices index. According to the official statisticians, total food prices were down 0.8% m/m in December – the fourth consecutive monthly drop - as all store-bought food groups fell during the month. Grocery food and seasonally cheaper fruit and vegetables were the main factors in the dip in food costs. Butter (-4.9%), chocolate bars, and wholemeal bread prices all fell. Tomatoes and nectarines were also cheaper, but avocado prices remain almost twice as expensive as they were a year ago.

The Kiwi Dollar opens in Europe this morning at USD0.7270 with AUD/NZD at 1.0930 and GBP/NZD1.8895.