Dollar rebounds a bit, thanks to hawkish FED

Daily Update - 01st February 2018

Yesterday’s Focus

• EUR Retail Sales, Unemployment Change, Unemployment Rate & Consumer Price Index
• USD Trumps Speech, ADP Employment Change, Pending Home Sales, FED’s Interest Rate Decision and Monetary Policy Statement

Yesterday’s Explained

The U.S. Federal Reserve ended its two-day meeting by announcing it would not raise its benchmark interest rate. However, it indicated that it expects inflation pressures to heat up as the year moves on.

The decision by the Federal Open Market Committee to leave interest rates at 1.25 to 1.50 percent was widely expected. This decision had almost no impact on the markets. However, investors were looking at the statement for clues on how the central bank might proceed for the rest of the year. This was going to be the news that moved the markets. The ADP Non-Farm Employment Change report showed the private sector added 234K jobs in December. This was much higher than the 186K forecast. The previous month was lowered to 242K.

Today’s Focus

• EUR Markit Manufacturing PMI
• USD Labour and Jobs data, ISM Prices Paid and ISM Manufacturing PMI

Today’s Market

Economic data out of the Eurozone this morning includes finalized January manufacturing PMI numbers, which will provide some direction for the EUR, with the markets likely to focus on new order, employment and wholesale price figures. January inflation numbers out of the Eurozone have been disappointing this week and will need to start showing some upward trends for the markets to become more convinced of the ECB taking a more hawkish stance on policy.

Across the Channel, economic data out of the UK this morning includes January house price figures and the all-important January manufacturing PMI.While we will expect the house price numbers to impact on UK property stocks, which were under pressure on Wednesday, the manufacturing PMI number will be the key driver for the Pound. December’s PMI had reported a solid increase in new orders, with new export sales on the rise on improving demand from Europe, the U.S, China and the Middle East, suggesting that there should be an uptick in January.

The markets will also focus on inflation figures within the report, with BoE Governor Carney having talked up the UK economy earlier in the week, raising the prospects of another rate hike should inflationary pressures not ease over the near-term. Economic data out of the U.S this afternoon will provide some direction for the Dollar, with 4th quarter unit labour cost and nonfarm productivity figures, together with the market’s preferred ISM manufacturing PMI scheduled for release. An uptick in unit labour costs and a relatively stable PMI would be Dollar positive. Gains are unlikely to last ling however, as market sentiment towards the government debt ceiling continues to weigh, with the government funding extension now coming back into the line of sight. There’s plenty for the U.S administration to do in order to resolve the government funding issue and that’s before considering Trump’s plans for infrastructure spending, which will add more pressure on the Dollar.