Desultory currency trading sets in after ECB fireworks, currencies move in tight ranges

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6 November 2017

Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

With the notable exception of Sterling, which fell sharply following the Bank of England’s first interest rate hike in ten years, the major G10 currencies traded in fairly narrow ranges last week.

T
he appointment of Jerome Powell as chair of the Federal Reserve seemed to have a soothing effect, as Mr. Powell is regarded as a consensus-building policy maker that will provide continuity and largely follow Janet Yellen’s policies. The headlines from Catalonia seemed to be less dramatic, the US payrolls report remained affected by the hurricanes, and currency markets generally saw little reason to change any of the recent narratives.

Consequently, all G10 currencies ended the week within 1% of where they had started it. In emerging markets we had another sharp move lower in the Turkish Lira, where inflation continues to rise while political pressure prevents the central bank from reacting appropriately.

This week looks fairly light on the data front. Focus will be elsewhere, particularly on the developing details of the US tax plan and the Brexit negotiations.

Major currencies in detail

GBP

We saw a clear case of ‘buy the rumour, sell the news’ around the Bank of England interest rate hike on Thursday.

The Pound had rallied since the summer as markets priced in the move with a higher degree of certainty, but the aftermath of the actual hike was unpleasant for Sterling. Traders focused on the removal of the statement that rates may need to rise more than the markets expect. We note that the forward projections for growth and inflation remained almost unchanged, and that Governor Carney stated that at least two more hikes will be needed. We think that the sell-off in Sterling is overdone.

EUR

The very weak October flash inflation data out on Monday went largely unnoticed by the market. This lack of reaction is very puzzling. The headline number pulled back to 1.4% from 1.5% the month before. More worryingly, the core number, that strips out volatile components, dipped even further to 0.9% from 1.1%, back to the Spring lows. We expect the ECB to revise its forecasts for inflation even lower at its December meeting. Prospects for any hikes in the Eurozone keep receding further into the future and the rising rate differentials with the US should keep up the pressure on the common currency well into 2018.

This week is quiet on the economic front, and we expect the Euro to take its lead from news elsewhere.

USD

Markets breathed with relief after the appointment of Jerome Powell as next Chairman of the Federal Reserve, which is expected to result in little change from Chair Yellen’s style of leadership and policy views. The Federal Reserve met last week but added very little information, signalling that the universally expected December hike is on track. The October payrolls report showed a strong bounce back in jobs and a drop in wages, both of which still reflect the impact of the hurricanes.

No first-tier data will be released this week. We think that focus will shift to the effects that the US tax cuts will have on an economy already near full employment. Overall we think this is a very bullish environment for the US Dollar.