Market Report - 08/02/2024
U.S Dollar strength renewed
The British pound gained traction this morning during the early part of the Asian session since we saw rising house price data from Halifax reveal a 1.3% month-on-month rise in January, (1.1% in the previous month).
Furthermore, UK retail sales increased by 1.2% year on year in January and UK services sector activity rose considerably, at the fastest pace seen in 8-months (according to PMI figures from January).
In additional significant data relating to January, UK business confidence hit a 2-year high in January according to Lloyd’s Bank. Many attribute this renewed confidence to improvements in personal finances for many individuals. Rishi Sunak further commented on the cost of living crisis just yesterday, by stating the cost pressures are starting to ease for UK households.
Some however still strongly believe that the bank of England may not be likely to cut interest rates any time soon. In support of this narrative, Deputy Governor (Sarah Breeden) stressed that inflation was still too high and that there was still “some way to go”.
USD
The USD opened on Thursday morning in a relatively narrow range and continues to hold just below a 12-week high which was reached earlier a little earlier this week. Risk-off sentiment and hawkish comments from two Federal Reserve speakers yesterday saw the US currency further renew its strength.
As aforementioned, yesterday saw several Fed speakers give a range of reasons for delaying potential tapering and the much talked about rate cutting cycle in the United States and the velocity at which this might happen. As a result of this (and last week’s stronger than expected Non-Farm Payroll data), we saw GBP/USD fall from 1.2770 to lows of 1.2525. There has been a slight resurgence today back to the low 1.26’s, however dollar strength is still the overriding theme in the markets as we edge towards the end of the week.
According to senior economists at Mizuho "Central banks need to be convinced that, not only will inflation come down but that it will stay down”. The market is now pricing in a less than a 20% chance that the Fed will begin to cut rates in March, down significantly from the start of the year and a nearly 60% chance of a 25 basis point cut in May.
EUR/USD on the other hand has been subject to slightly larger moves over the last fortnight, moving from 1.1030 to lows of 1.0720 with overwhelming euro weakness observed. A strong and resilient US labour market has certainly been a driving factor in these moves.
Lastly, the dollar index was up 0.1% to trade at 104.14, hovering below Monday's 104.60. This is the highest level since November 14, having been propelled higher after Friday's NFP jobs report.
EURO
Across the channel in mainland Europe there has been a steady flow of low importance economic data throughout the week, mainly based on economic output data of the individual European countries.
Monday began with various PMI figures out from Italy, France, Germany and Europe. Most of these data points showed that various industries were still in contraction revealing figures below 50 ( below 50 is a contraction). The positive news from these figures was that the pace of contraction was slowing and a move towards growth was getting nearer and nearer. The market did not react to much of this lower tier data.
We also saw the Eurozone Producer Price Index released, which showed a decline in the prices received by domestic producers of commodities in Europe.
In other news, German Factory Orders showed significant growth and European retail sales showed a continuation in a negative trend on European highstreets (although a smaller contraction was seen than previously forecast). These figures enabled the Pound to remain at 6-month highs versus the Euro.
On Wednesday, data releases were relatively insignificant to market makers. Industrial Production figures however were released by Germany, which seemed to undermine the Factory Orders result from the day prior. Contraction in this space was forecast, however the result of a-1.6% contraction seemed to shock markets slightly and the Pound was able to strengthen its grip on the Euro.
For the remainder of the week, things are looking fairly quiet. On Thursday, ECB Members Elderson and Lane have speeches planned although these speeches are unlikely to move markets unless they give some unexpected hints at forward guidance on ECB Monetary Policy.
The week ends with a more notable piece of data as German Inflation figures will be released at 7am on Friday.
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