US Dollar rally halted after equity markets edge higher

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13 February 2018

thomasdodds

The major currencies spent much of Monday in a holding pattern following a particularly hectic few days of trading amid last week’s sharp sell-off in equity markets.

A
s is generally the case during periods of such dramatic declines in stock prices, the US Dollar and Japanese Yen were the best performers, as risk off trading led to a strong performance in those currencies deemed safer. Yet, with equity markets beginning to stabilise and initiate a tentative rebound on Monday, gains for both the Dollar and the Yen stalled. The S&P 500 rose back above the 2,650 mark yesterday afternoon following its sharpest decline in more than two years last week. In the absence of any significant economic news out of the US, the greenback subsequently edged modestly lower, although retreated again from its near three week high early this morning.

In the absence of any major economic data releases, the Euro traded mostly sideways as traders looked ahead to a number of central bank speeches later in the week. European Central Bank members Mersch, Praet and Lautenschläger will all be making public appearances on Wednesday and Thursday. Wednesday’s preliminary GDP data for the Eurozone, the fourth quarter, could also prove a market mover.

McCafferty talks up rate hikes, UK core inflation edges higher

Sterling languished around a three week low against the greenback on Monday with last week’s equity market rout overshadowing the Bank of England’s optimistic assessment of the UK economy. The relative weakness in the Pound in the past few sessions has been somewhat surprising, given the BoE was unambiguously hawkish last week. The bank seemingly geared the market up for another interest rate hike when it releases its next Quarterly Inflation Report in May.

Bank of England policymaker Ian McCafferty delivered an equally and characteristically hawkish message during an LBC radio interview on Monday. McCafferty said that the UK economy was holding up relatively well and that rates would go up ‘slightly earlier’ than thought in late-2017. He did, however, cite uncertainty around the Brexit negotiations that could have an impact on both business and consumer confidence.

Meanwhile, this morning’s inflation data further supported the case for higher rates in the UK. Headline inflation remained unchanged at 3% in January after investors had eyed a modest decline, while the core measure rose to 2.7% from 2.5%. With an earlier-than-expected rate hike from the BoE now firmly on the table, inflation news over the next few months will likely take on added importance.