OANDA Market Insights podcast (episode 24)

OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Trump attacks Fed over rate rise, UK inflation figures hit sterling, Barnier dismisses Brexit white paper , Google fined record sum.

USD Weaker After Trump Interest Rate Comments

Canada: Inflation Hit Six-Year-Plus High

Dollar Rally Ends With Trump Monetary Policy and Currency War Comments

 

Is BoE Rate Hike in Doubt After Inflation Data?

GBP slides as core inflation falls below BoE target

Focus is back on the central banks on Wednesday as we await the second appearance this week of Federal Reserve Chair Jerome Powell and the Bank of England’s interest rate plans are questioned following some softer inflation numbers.

The pound is tumbling again on Wednesday after the latest inflation data for the UK threw a spanner in the works ahead of the BoE meeting in two weeks. There was a growing belief that the central bank will raise interest rates at the August meeting – rightly or wrongly – with the data this week seen providing additional support for such a move but the numbers we’ve seen this morning have done quite the opposite.

GBPUSD Daily Chart

OANDA fxTrade Advanced Charting Platform

Earlier this year when policy makers were preparing a May hike, inflation was much higher and was seen as being a key reason behind the desire to raise rates. Had that number ticked higher again today, as was expected, it would – along with the other data we’ve seen recently – have provided policy makers an opportunity to follow through on previous plans without coming under too much scrutiny.

Fed Powell advances the dollar

With that not happening and core CPI falling to 1.9%, below the central bank’s 2% target, the decision becomes that much more difficult and uncertain. Moreover, the timing of the meeting is not ideal, with Brexit talks not going smoothly and only a few months in which they need to be concluded. Ordinarily, it would make much more sense for the Monetary Policy Committee to wait until November when much more clarity will exist over the economy and Brexit, but I’m not sure they will and market pricing appears to currently support this view.

UK Inflation

August rate hike still well priced in

An August rate hike is still 72% priced in, down from 77% yesterday, despite this morning’s release, which suggests investors do not believe policy makers will be deterred. The BoE’s credibility has long be brought into question, most recently in May when after months of hinting at a rate hike, it changed its mind due to first quarter weakness which it believed was transitory.

UK Interest Rate Probability

Source – Thomson Reuters Eikon

If it holds off again in two weeks despite the bounce back in the economy, people will seriously question whether any attention at all should be paid to the central banks forward guidance. For this reason, I think they will raise rates and hope they won’t be forced to reverse course in the near future, say if Brexit talks collapse.

Powell speech may offer little new information on interest rates

Attention will now turn to Powell’s testimony on the semi-annual monetary policy report in front of the House Financial Services Committee, where the Fed Chair is once again expected to deliver a very upbeat assessment of the economy and stick to previous views on rate hikes. The Fed has become one of the less interesting central banks due to its reliability and transparency – something that is very much a goal of all central banks – which is likely to make today’s appearance less of a market moving event.

USD/JPY advances to six month high post-testimony

That’s not to say that it doesn’t have the potential to cause market swings, rather that what Powell will say will likely already be priced in and so any movements are less likely to be significant. He may surprise us, should he get into a deeper discussion on trade wars for example and the implications for monetary policy, but as yet this is not something that has had an impact on the outlook.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

US Inflation Eyed as Markets Pare Losses

Markets higher after tariff-related losses

It’s been a more positive start to trade on Thursday, with equity markets in the green and paring Wednesday’s losses as investors continue to weigh up what impact the latest trade tariffs will have on the global economy.

While markets have typically reacted negatively to any escalation on trade, the overall impact has been relatively modest under the circumstances which suggests investors are far from panic mode right now. Many agree that tariffs will ultimately be bad for the global economy and therefore markets but there still seems to be some hope that common sense will prevail and a full blown trade war will be averted.

With Donald Trump now pursuing another $200 billion in tariffs against China though, we may have to wait a while as he is not easing up and China – and others – is determined to prove it will not be bullied into submission. Perhaps if the economy starts to suffer or the Republicans do badly in the midterms in November Trump will be forced to consider an alternative approach.

Equities shrug off trade tariff tensions

US inflation seen rising further

As it stands though, the economy is doing very well – aided by last year’s tax reforms – and the Federal Reserve is on course to raise interest rates twice more this year, having increased them on two occasions already. The central bank is clearly more concerned about the economy overheating right now than the prospect of a trade war – although this is also on their radar – and the inflation data we’ve seen very much justifies their view.

While CPI is not the Fed’s preferred measure of inflation, it does provide valuable insight and is typically released a couple of weeks before the core PCE price index. Today’s release is expected to show prices rising by 2.9% in June compared to a year earlier, with core inflation having risen by 2.3%, above the Fed’s 2% target. The core PCE price index may be a little behind this at 2% but this is at target and on the rise. Any unexpected increase today may suggest a similar rise is on the cards for the PCE numbers as well.

(Update 1) A tenuous and unstable state of affairs

ECB minutes eyed after dovish tightening last month

The minutes from the most recent European Central Bank meeting will also be released today. The ECB confirmed at the last meeting that it will end its quantitative easing program at the end of the year and won’t raise interest rates until at least the middle of 2019, which was largely in line with expectations. The dovish spin that was put on it though weighed on the euro at the time and it will be interesting to see whether the minutes have a similar impact.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Futures Higher But Market Remains Vulnerable

Inflation and Retail Sales Data Eyed Markets Gradually Stabilize

US futures are pointing to a stronger open on Wednesday, building on the small gains posted at the start of the week and offering some hope that stability is slowly returning to the markets.

Given the volatility that we’ve seen over the last week or so, which was initially attributed to higher interest rate expectations following the January jobs report, traders will be closely monitoring the US inflation and retail sales releases today. Both numbers will be released shortly before the open on Wall Street and could be the trigger for further volatility, especially if the CPI exceeds expectations.

While the CPI number isn’t the Federal Reserve’s preferred inflation measure – which could impact how traders respond to it – it is released a couple of weeks earlier than the core PCE price index and so is seen as being indicative of inflationary trends. This means markets can be sensitive to the release, particularly during times of increases sensitivity, like we’re seeing at the moment.

DAX Gains Ground on German, Eurozone Growth

Markets Still Appear Vulnerable to Downside Shocks

Volatility has remained since the initial spike last Monday although the VIX has more than halves since then, so things are calming down a little. That said, investors still appear jittery and equity markets remain some way off their highs. Yields are back at last Monday’s levels and have pushed above them in recent days so this blip hasn’t had any lasting impact on medium-term interest rate expectations, although that could change if we see further episodes.

The dollar has been one of the beneficiaries of the recent volatility, with the increased US interest rate expectations lifting the greenback off its lows after months of significant downside pressure. The dollar index rose briefly above 90 late last week before some profit taking set in and while it remains vulnerable to further selling, I wonder whether we’re going to see more of a bounce in the near-term, particularly if we get some decent numbers today.

US Dollar Index (Reuters) Daily Chart

Source – Thomson Reuters Eikon

Will it be a Valentines Day Massacre for the Dollar?

Bitcoin Making Steady Gains But More Pain May Lie Ahead

Bitcoin has been making steady improvements over the last week, having fallen below $6,000 briefly, roughly 70% from its high reached in December. While cryptocurrency enthusiasts will be encouraged by the period of stability in price and gradual gains during that time, I think it still looks vulnerable to near-term pain before a bottom can be claimed.

I think $9,000 to $10,000 will pose some real challenges for bitcoin but if it can overcome these levels, it will be a very encouraging sign for those bullish on the cryptocurrency. Negative news flow has been a major test for bitcoin so far this year and if that keeps coming, I struggle to see how it can gain any real upside momentum.

Bitcoin (CME) Daily Chart

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

US Dollar Rout Continues With Inflation Data in the Horizon

Safe haven flows after the stock market collapse favour JPY and CHF

The US dollar is once again on the back foot on Tuesday. The currency is softer against major pairs ahead of key US inflation data for January. The U.S. Federal Reserve along with traders will be looking at the consumer price figures for signs of higher inflation and further validations of their plans to keep raising US interest rates in 2018. The U.S. non farm payrolls (NFP) report earlier in the month boosted the USD with a positive wage growth signal at 0.3 percent monthly gain. The market will be watching the core CPI released on Wednesday, February 14 at 8:30 am EST looking for confirmation.

  • US January inflation expected to underperform
  • US Oil producers putting downward pressure on prices
  • US inflation trend to continue on Thursday with the release of the PPI



The EUR/USD gained 0.52 percent on Tuesday. The single currency is trading at 1.2355 ahead of the release of monthly inflation and retail sales data in the US. The U.S. Federal Reserve is expected to lift rates 3 or more times this year, but to do so it would need inflation in the US to pick up, as this was the biggest debate within the central bank last year. Doves within the Federal Open Market Committee (FOMC) are pushing for more patience, until inflation rises, while the hawks who lost Chair Yellen as their biggest supporter would rather raise rates sooner rather than later. The core consumer price index, the Fed pays more attention to this data point that excludes food and energy, is expected to come in at 0.2 percent. Retail sales are forecasted to have gained 0.2 percent in January, but the core reading to have advanced by 0.5 percent by removing auto sales.

The tumble in stocks prices has had a negative effect on the confidence in the US economy. The employment report released on February 2 posted higher than forecasted number of jobs and more importantly hourly wages rose by 0.3 percent. Several dollar rallies that started with a strong employment report have been cut short by disappointing inflation and retail sales data. This time around the USD has not been able to find solid footing in 2018. With a stock market correction and bond yields at four year highs inflation takes a more important role as it could solidify the case of Fed hawks and make way for a 4 rate hike scenario. The USD has been impacted by improving growth around the globe and other central banks have hiked or signalled and end to low rates cutting the lead of the U.S. Federal Reserve and reducing the attractiveness of the dollar. A higher than expected inflation figure could trigger a US currency recovery alongside a drop in the stock market as higher rates would be forthcoming. Vice versa a lower than expected consumer price gain could sink the dollar even lower as the market is already pricing in 3 rate hikes and could start reevaluating that position with weak inflationary pressures.

European politics have reached some stability with the German coalition now in place but with the upcoming Italian elections in March the boat is sure to rock. Economic fundamentals have been strong in the eurozone with Germany leading the way as usual. The gap between the U.S. Federal Reserve and the European Central Bank (ECB) is closing with regarding monetary policy. The ECB is expected to end its QE program and could even lift interest rates later this year. The week will bring minor indicator releases in Europe with the German central bank chief Jens Weidmann speaking in Frankfurt on Wednesday, February 14 at 3:00 am EST. Earlier that day the GDP figures for Germany will be released with a 0.6 percent growth expected.



The USD/JPY lost 0.84 percent in the last 24 hours. The currency pair is trading at 107.73 as the JPY has benefited from risk aversion and risk appetite moves. Usually the USD is the main beneficiary of a risk aversion move, but given some of the global uncertainty is happening in Washington and Wall Street the greenback is not the sturdiest safe haven for investors. The USD is soft ahead of inflation and retail sales data with both having to overcome concerns.

The Japanese Prime Minister Shinzo Abe is expected to reappoint Haruhiko Kuroda as the head of the Bank of Japan (BOJ) for his second term and that in itself could be a sign the central bank is ready to start dealing back some of its massive stimulus program.

Market events to watch this week:

Wednesday, February 14
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
10:30am USD Crude Oil Inventories
7:30pm AUD Employment Change
Thursday, February 15
8:30am USD PPI m/m
Friday, February 16
4:30am GBP Retail Sales m/m
8:30am USD Building Permits

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar