An action-packed week for financial markets ended on a quieter note with global equity indices little changed, US Treasuries slightly higher and the dollar putting in a broadly weaker performance. Oil prices struggled to establish a clear direction, although gold was heading for its highest finish in a fortnight.
The US Federal Reserve dominated the week’s proceedings as its open market committee delivered a widely expected 25 basis point rise in interest rates but maintained its forecasts for the pace of tightening this year and next. It was bad news for dollar bulls, and the US currency subsequently slipped to multi-week lows against its main G20 rivals. The Mexican peso and South African rand led the way as emerging market currencies staged a broad advance.
The dollar index was down 0.1 per cent at 100.29 on Friday, and 3.4 per cent below a 14-year high struck at the start of January. Sterling put in one of the week’s best performances against the dollar, and its 0.3 per cent gain on Friday to $1.2396 left it 1.8 per cent higher over the five-day period. In contrast to the Fed’s “dovish hike”, the Bank of England’s decision to keep rates unchanged this week was viewed by many as a “hawkish hold”, after one member of the UK Monetary Policy Committee unexpectedly voted for a rise in borrowing costs. The overall tone of the meeting was less dovish than might have been expected with a suggestion that other members are closer to voting in favour of tighter policy, should the data continue to surprise to the upside.
The euro, although 0.2 per cent lower against the dollar at $1.0743, was 0.7 per cent firmer on the week and well up from a midweek low of $1.0602. As well as the Fed’s cautious stance on rates, the poor showing by the anti-EU Freedom party of Geert Wilders in this week’s election in the Netherlands supported the single currency. The Dutch election helped to calm jitters over the upcoming French election. After the FOMC/Dutch election combination, the implied European equity volatility index sank close to record lows. The lack of volatility can be seen not only in equity markets but also in bond and FX markets, where measures of implied volatility have fallen sharply.
Eurozone finance ministers will gather in Brussels on Monday in unusual circumstances. Jeroen Dijsselbloem, above, who has chaired such eurogroup meetings since January 2013, has just seen his party crushed at the ballot box in the March 15 Dutch elections. Mr Dijsselbloem’s eurogroup presidency hinges on his role as the Netherlands’ finance minister. Coalition talks in the Netherlands mean that he could still be in office for months, and no discussion about his eurogroup position or a replacement will take place on Monday. But the election outcome means that euro area governments are now confronted with a problem they did not want. In all likelihood, they will need to find a new eurogroup president in the next few months, despite Mr Dijsselbloem’s popularity among his peers. The main item on ministers’ agenda on Monday will be Greece, and the efforts to reach a deal with the International Monetary Fund on the next stages of the country’s bailout programme.
EU and IMF officials have been negotiating intensely in recent days in a bid to lock down a deal on tax, pension and labour market reforms that Athens should implement once its aid programme ends in 2018. Commenting on the talks last Thursday, an EU official said: “Progress has been made on tax but there are still quite some open issues left in terms of pension issues, while on the labour market there has been no perceptible improvement.” No breakthrough is expected at Monday’s meeting, with ministers instead braced for further talks after the IMF’s spring meeting in late April.
Tuesday sees UK inflation figures released. For the first time in more than three years, figures to be published on Tuesday are expected to show that consumer price inflation in the UK hit, and possibly exceeded, the Bank of England’s 2 per cent target in February. Fuel and food prices are expected to have contributed to this, as price falls seen a year ago are not repeated. Though there was a lot of discussion of vegetable prices during the “courgette crisis” at the start of the previous month, this may not have much noticeable effect in Tuesday’s figures, as the affected vegetables comprise only a small share of total spending. “I think it’s been overcooked,” said Alan Clarke of Scotiabank. “I don’t think it will be causing us to have an even bigger increase in inflation.” Imported products will also contribute to inflation as the depreciation of sterling continues to feed through to consumer prices.
EUR/USD which slid to a low near 1.0730 bounced back to a high near 1.0765, as the Usd resumed its downward spiral across the board. The single currency also cheered Macron keeping the edge in the French election race and comments from ECB policymaker Visco who said the central bank could shorten break between QE exit and a rate hike. Ahead today, pan-Eurozone labour costs and Bundesbank monthly report are due this morning, while the ECB’s Weidmann and FOMC member Evans will be in focus later in the North American session. From a technical view, we may find some resistance at the daily high followed by the February 6th high at 1.0802. On the downside, Friday’s lows at 1.0728 and yesterday’s low at 1.0704 are in focus.
GBP/USD which slid to a low near 1.2375 weighed by the Rightmove house price data bounced back towards 1.2400 amid broad based Usd weakness. The domestic front stays unchanged so far, with market players still waiting for UK PM May to finally trigger Article 50. No major economic releases in the UK docket today, but a speech from BoE chief economist Haldane will be eyed later in the evening. In terms of technicals, Friday’s high at 1.2404 was our first resistance level which was also the March 1st high, above which we target the February 28th high at 1.2470. On the downside, today’s low at 1.2378 and Friday’s low at 1.2321 are in focus.
USD/JPY extended last week’s declines to fresh monthly low near the mid-112.00 level with demand lacking amid the absence of Tokyo trade. The pair has since managed to bounce off a few pips and is currently hovering around 112.65. Ahead today, highlights include Chicago Fed national activity index and Fedspeak from Evans. In terms of tehcnicals, we look for support at the overnight low of 112.49 followed by the February 28th low of 111.67. On the upside, the overnight high at 112.76 and Friday’s high at ¥113.49 may offer resistance.