Fundamentals Remain Positive Despite Sell-Off

Despite the recent fluctuations and concern about major corrections in global equity markets, Craig Erlam, senior market analyst at Oanda, says fundamentals, like corporate earnings, remain positive.

CAC Climbs on Strong German, Eurozone GDP Reports

Futures Higher But Market Remains Vulnerable

Will it be a Valentines Day Massacre for the Dollar?

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.

Are BoE Interest Rate Expectations Too Bullish?

BoE to Release New Economic Forecasts Alongside Rate Decision

The Bank of England holds its first monetary policy meeting of the year this week, after which it will release the quarterly inflation report alongside its monetary policy decision and hold a press conference with Governor Mark Carney.

The event – which is often referred to as “Super Thursday” – is one of the most hotly anticipated of the UK calendar as it offers significant insight into the thoughts of the Monetary Policy Committee, something that’s become increasingly sought after since it started raising interest rates in November.

BoE policy makers took the decision to raise interest rates after inflation surpassed 3% in November, a level deemed by many to be too high despite being driven by one-off currency moves in the aftermath of Brexit. This is led many economists to forecast another hike this year and two more over the three forecasting period, but have they and others been misled by the central bank?

GBP/USD – Pound Under Pressure, BoE Rate Decision Next

In many ways, the dilemma facing the BoE is no different than that facing other central banks – the economy is growing, unemployment is very low, labour market slack appears low and yet inflation is stubbornly low – but one very important difference exists, Brexit.

The sheer amount of uncertainty that exists because of Brexit has resulted in low growth compared to its peers and its pre-referendum levels, businesses are reluctant to invest and the consumer squeeze is taking its toll. The economy may well have shown more resilience than many feared prior to the referendum but is this really the kind of environment that the central bank should be raising rates in? If not, why did they raise by 25 basis points in November?

The central bank will naturally point to the above target inflation as warranting a hike which would be fair, assuming they believed it would remain at those levels of exceed it, which is debatable. This would also indicate a willingness to raise more if inflation remains well above target. While it’s likely to have peaked, it’s not expected to fall very far for a while which is why people may be anticipating further hikes.

Another possibility could be that they wanted to reverse the emergency post-Brexit rate cut which many Brexiteers criticized at the time and some others have questioned the need for since. Especially when you consider that the central bank was reluctant to move below 0.5% throughout the aftermath of the global financial crisis and eurozone debt crisis. If lower rates were seen as risky or unnecessary then, can they possibly be warranted now? If not and this was behind November’s decision, are the markets wrong in anticipating another hike this year and more after?

Gold Slides to 4-Week Low as Stock Markets Settles Down

This could become a lot clearer in the coming meetings and Thursday should offer some early insight, particularly as the inflation report includes growth and inflation forecasts. Any indication that policy makers are in no rush to raise again could see markets pare back expectations resulting in lower yields on UK debt which could in turn weigh on the pound. We may not get this on Thursday though, assuming we do at all, as they may opt to gradually soften their stance over a number of meetings, particularly if Brexit negotiations aren’t progressing as planned. Ultimately, these will have a major bearing on how interest rates move over the three year forecast period.

GBPUSD Daily Chart

OANDA fxTrade Advanced Charting Platform

The FTSE 100 may also be sensitive to the BoE event on Thursday, given its inverse relationship with the pound. A stronger pound has typically weighed on the index due to the external exposure of the companies that make up the index, while a weaker pound has been positive for it, as seen in the aftermath of the referendum. It’s been a rough couple of weeks for the FTSE, the last couple of days in particular as volatility has returned in force and equities have been sent into a tailspin lower. A strengthening pound – should the BoE release bullish forecasts and adopt a hawkish tone – may not help matters.

FTSE and GBP Trade Weighted Index Correlation

Source – Thomson Reuters Eikon