Daily FX Update

The pound rallied yesterday following better than expected PMI data. On the release, GBPUSD gained 1% and the upward trend continued throughout the day reaching highs of 1.2147. GBPUSD sits in the 1.2100 region as we print, up 0.52% this week. Trader's have since increased bets on BOE rate hikes, with markets now fully pricing in a 0.25% rise at the next meeting, and expect peak rate to now reach 4.65%. Gilts sold off pricing two-year yield as high as 18 basis points to 3.90%, while the 10-year yield jumped as much as 14 basis points. The pound rose as much as 0.7% against the euro.

Recent survey data shows that the UK is holding up better than expecting in the cost-of-living crisis. Output rose in the private sector for the first time in seven months and stronger-than-expected retail sales point towards resilience. 

The FTSE has dipped 0.62% since the open.

Approaching the one year anniversary of the outbreak of the Russia/Ukraine war, tensions have resurged following Putin’s announcement to suspend the START nuclear pact. EURUSD has continued to trend lower as investment floods into the safe-haven greenback following the comments, with the pair trading 0.4% lower intra week.

Stronger than anticipated growth in China has led investors to grow increasingly concerned over inflation in the euro area, with economists predicting inflation could end the year 0.5% higher than initially thought, should economic growth in China continue to surprise.

German inflation data showed no sign of easing for January, wit the harmonised print reading 9.2% YoY, in line with expectations. The high print will likely continue to add pressure to the ECB for further rate hikes. German business confidence failed to meet expectations, printing at 91.1, whilst the same print for France ticked higher than forecast as confidence levels that the economic slow down may be short-lived improved.

US stocks had their worse day of 2023 yesterday, ahead of today’s FOMC meeting minutes. This is a clear sign that the market is now in a risk-off position. The relevance of the minutes is questionable, as the inflationary outlook had considerably changed since the last meeting. When the FOMC last met, inflation seemed poised to undershoot the FOMC’s target, therefore the minutes are expected to showcase the increasingly dovish sentiment at that time. Despite this, given last weeks’ slew of data all displaying upside risk to inflation, any speak of a pause in the tightening cycle may already be outdated.  

 The US dollar extended gains yesterday as upbeat PMIs boosted the greenback. Business activity defied forecasts, printing at an 8-month high, above the 50 level for the first time in that period. The services sector contributed to the rise, whilst like its European counterparts, manufacturing remained weak. Increasing geopolitical tensions between the US and Russia also contributed to the move, as investment flooded into the safe-haven dollar following Putin’s remarks over the START nuclear pact. The DXY trades 25bps higher intra week. 

The Reserve Bank of New Zealand raised key rates by 50bps, to 4.75%, broadly in line with expectations. Meeting minutes cited “early signs of demand easing” however reiterated that labour shortages remain a concern as well as inflationary pressures. NZD gained 0.4% on the release, before parring gains to trade unchanged on the day.  

China’s offshore Yuan fell to the lowest level since January against the dollar, whilst emerging markets fell alongside equities and concerns ahead of todays Fed meeting minutes.  

The Israeli shekel has plunged to its lowest level since March 2020, falling around 4% so far this week as lawmakers took its first step toward approving its judicial reforms, plans that have sparked waves of economic concern. The proposal needs to pass two more rounds of votes before becoming law. 

USDILS is currently trading just below 3.6900 at time of writing, 1.25% higher intra day, despite the bigger-than-expected rate hike on Monday.