Head of FX Strategy
Summary: Sterling rises further on a story that the DUP may be warming to a May’s original deal, provided changes are made. The ECB reaction was a back-and-orth affair, with EURUSD pushing on key support again late yesterday after an earlier direction change.
The market seems to want to default to a hopeful stance at every turn and EURGBP is suddenly challenging the bottom of the well-established range toward 0.8600. Developments should continue apace from here as May's 'Plan B' will be set for a vote next Tuesday and the run into March 29 continues. The odds are shifting in favour of May revisiting the existing deal with some alteration and a long delay to Article 50, with Labour opposition unable to put together a coherent plan for what to do and thus reducing the likelihood of a second referendum or elections in the foreseeable future. The Telegraph discusses five possible parliamentary votes next week and argues that that one to simply time limit the contentions Irish backstop to the end of 2021 has the best odds of salvaging the deal.
Yesterday’s European Central Bank meeting was largely in line with expectations and perhaps even marginally less dovish than expected as ECB president Mario Draghi’s discussion of the potential for a TLTRO was lukewarm at best and the policy guidance in the statement kept the timeline for the anticipated first hike, even as he noted that risks for the EU economy had shifted to the downside.
Draghi was rather insistent in pointing out the strength in labour markets in the Q&A session. During the initial part of the press conference, EURUSD made a stab at the 1.1300 support before rebounding higher again, only to fall later, most likely on reasons linked to the US dollar (see below) or the weight of EURGBP selling.
Later in the session, the US dollar was suddenly bid again, likely as President Trump’s economic adviser Larry Kudlow was out apparently leaking a strong surge in nonfarm payrolls for the January data cycle (to be published next Friday, just two days after the FOMC meeting) as he stated that January payrolls were likely to show strong growth, given the very small jobless claims number.
Yesterday’s seasonally adjusted weekly claims number were the smallest ever registered in the data series if measured as a percentage of the US labour force.
With China pushing hard to give the CNY a boost into a key visit from its top trade official next week, the USD may have a hard time rallying against riskier currencies here – but next week looks pivotal, given the odds that the shutdown will have to end very soon and with trade negotiation headlines carrying increasing weight.
EURUSD and 1.1300 are a critical focus for USD traders, but risk appetite has turned back a bit higher here and JPY crosses have refused to sustain drops as enthusiasm for emerging market assets continues. USDJPY is quietly pulling back toward the 110.00 area and could have a look above that level before finding more notable resistance if the market decides next week that it has been too quick to front-run the end of the Fed hiking cycle on a massive payrolls number and new highs for the cycle in earnings, for example. Remember that next week’s FOMC meeting and all meetings from now on will have a press conference.
• 0830 – Sweden Dec. Retail Sales
• 0900 – Germany Jan. IFO Survey
• 1330 – US Dec. Preliminary Durable Goods Orders (postponed due to shutdown?)
• 1500 – US Dec. New Home Sales (postponed due to shutdown?)