14 Feb 2017

US rate hike and UK inflation surprise markets 

United States Dollar:

Yellens testimony was the highlight of yesterday’s calendar and it’s fair to say it took a few of us by surprise. The Greenback was under pressure going into this after Michael Flynn quit over revelations he had discussed U.S. sanctions against Moscow before Trump took office. Yellens speech took a more hawkish tone than most were expecting and the market seems to be under-pricing an upcoming rate hike. This doesn’t mean they will move in March, but the Fed wants to have the option to move. Yellen's hawkish tone dovetailed with recent comments from other Fed officials. Dallas Fed President Robert Kaplan on Monday argued the Fed should move soon to avoid falling behind the curve, especially as fiscal policy could drive faster growth and inflation. Earlier on Tuesday, Richmond Fed President Jeffrey Lacker said the central bank will likely have to raise interest rates more rapidly than financial markets currently expect. Cables high yesterday pre-release was 1.2545, dropping to 1.2456 where we currently sit. We have a busy docket today for the Dollar all kicking off at 1.30pm UK time.

The Great British Pound suffered a sharp and sudden sell off Tuesday falling back through 1.25 U.S Cents and touching 2 week lows at 1.2449. Inflation printed at 1.8% where a 1.9% was expected. Although falling short of its expected number it showed consumer prices rose last month at the fastest pace since June 2014 and the expectation is for it to rise further. The Bank of England expects inflation to approach 2.7 percent by the end of the year while many economists say it will go above 3 percent, putting to the test the BoEs decision to keep interest rates at a fraction above zero. Retail price inflation rose to its highest since June 2014, at 2.6 percent. December house prices showed a 7.2 percent annual rise across the United Kingdom, compared with 6.1 percent in November. Prices in London alone rose 7.5 percent on the year. Our very own Jake Trask, Corporate dealer at UKforex, was on the BBC yesterday after the announcement and here’s what he had to say, “Sterling fell today as UK inflation showed slower growth than the markets were expecting. Should tomorrow’s (today) wage growth numbers miss target, then the narrowing spread between inflation and salary rises may start to impact on consumer spending power later in the year. Despite rising inflation, Mark Carney has indicated he is in no rush to raise UK interest rates. This slight undershoot will allow him a little more leeway to keep rates at 0.25% well into 2018.” All eyes will now turn to the employment data at 9.30.

We expect a range today in the GBP/USD 1.2365 - 1.2590


The single currencies domestic data was a mixed bag yesterday. Key talking points will be the German ZEW number and flash GDP. The ZEW number recorded a decrease of 6.2 points in February. The downturn in expectations is likely to be the result of the recently published unfavourable figures for industrial production, retail sales and exports. Political uncertainty regarding Brexit, the future US economic policy as well as the considerable number of upcoming elections in Europe further depresses expectations. GDP rose by 0.4% in the euro area (EA19) and by 0.5% in the EU28 during the fourth quarter of 2016, compared with the previous quarter. Markets failed to move on this data and inflation in the UK was the biggest market mover, GBP/EUR moved from 1.1811 down to 1.1725, we currently move at 1.1791.

We expect a range today in the GBP/EUR rate of 1.1720 – 1.1850

Aussie and Kiwi Dollars:

Throughout yesterday the Aussie advanced being fuelled after an NAB report showed business confidence grew at a faster rate than expected in January while Chinese inflation data surpassed expectations. GBP/AUD started the day at around 1.6396 and we finished down at 1.6196, we currently sit at 1.6239. Domestic data overnight has shown consumer confidence gain 2.3% in February. The Westpac survey rose at a faster pace last month, a sign recent job gains were translating into better views about personal finances and the economy.

The New Zealand dollar traded in a narrow range in the local trading session yesterday (0.7170 – 0.7200) against its US counterpart as an increase in January food prices 0.9% saw little movement in currency markets. We won’t see any domestic data until Thursday night for the Kiwi but a raft of US releases today could cause movement for the antipodean currencies.

We expect a range today in the GBP/AUD rate of 1.6170 – 1.6330p>

We expect a range today in the GBP/NZD rate of 1.7270 – 1.7450

Data Releases

AUD: Employment Change, Unemployment Rate, MI Inflation Expectations

EUR: Trade Balance

GBP: Average Earnings, Claimant Count, Unemployment Rate

NZD: No data

USD: Retail Sales, CPI, Manufacturing Sales

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