BoE hike still priced in despite worrying UK data

GBP bounces back after data driven selling

European markets are trading in the red early in the session on Thursday, with the FTSE 100 the only major index in the green, supported by weakness in the pound after the release of some more disappointing data for the UK.

The UK retail sales data this morning may have dealt another major blow to the Bank of England’s hopes of raising interest rates in August, bringing an end to what has likely been a very frustrating week for policy makers. In recent weeks it has appeared that the Monetary Policy Committee had once again come around to the idea that raising interest rates in August is appropriate after plans in May were derailed by a frustratingly weak first quarter, something policy makers appeared to have correctly assumed would prove to be a temporary lull.

The data this week may have thrown another spanner in the works, with labour market figures showing a tight labour market by uninspiring wage growth, core inflation falling below 2% and now modest retail sales growth in what was expected to be a stellar month. This is clearly not the platform policy makers were hoping for when preparing investors for a rate hike but they may still seize the opportunity before it’s taken away from them for a prolonged period.

DAX takes pause from recent gains

Traders still convinced of rate hike despite week of bad releases

There may well be a strong feeling in the MPC that the central bank should have pushed ahead with a hike in May and stood by its belief that weather had a negative but temporary impact on the economy which would have given it the freedom to be patient through the rest of the year. Instead, it now finds itself in a position were the most recent data hasn’t been great and Brexit talks are not progressing as hoped, meaning it would make far more sense to hold off until November, something that would likely result in another backlash against the policy of forward guidance.

UK Interest Rate Probability

Source – Thomson Reuters Eikon

While holding off would make sense, there is clearly a view in the markets that this will not happen and the central bank may stick to plans to hike in two weeks. Despite numerous setbacks this week, a hike is still currently 68% priced in and after initial selling, the pound is showing some resilience and holding above 1.30 against the dollar. It seems traders are awaiting any hint from the BoE that plans have been put on hold again, at which point the resilience will likely break and possibly aggressively.

GBPUSD Daily Chart

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US earnings, data and Fed speakers eyed

Over in the US, futures are tracking the majority of Europe lower, with the major indices currently seen opening around a tenth of one percent lower. This comes after Federal Reserve Chair Jerome Powell once again gave an upbeat assessment of the economy on Wednesday, in his appearance in front of the House Financial Services Committee. With the Fed on a quite clear and consistent course on interest rates, there wasn’t a huge amount learned in either appearance that we already didn’t know.

‘Footy’ dented U.K retail sales and pounds sterling

Today it’s looking a little quiet for the US. There are a couple of pieces of data that traders will be looking out for ahead of the open – Philly Fed manufacturing index and jobless claims – and we’ll also hear from Powell’s colleague at the Fed, Randal Quarles. With the season now up and running, there’ll also be a big focus on US earnings with 21 companies reporting including Microsoft and BNY Mellon.

Economic Calendar

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

US Indices on Course For Full House

Futures Point to Full Week of Gains After Sharp Correction

US equity markets could end the week with a full house of gains as long as indices manage to hold onto the small gains being seen in futures ahead of the open.

This would also bring an end to two shocking weeks for equity markets that saw more than 10% quickly wiped off indices, the first time we’ve seen such a move since the start of 2016. While the prospect of higher yields and interest rates, combined with a surge in volatility, have been blamed for the decline, the rebound we’re now seeing reaffirms the belief that fundamentals are still strong which should prevent the situation deteriorating further.

There are a few economic releases that traders will likely be aware of as the week draws to a close. The UoM consumer sentiment reading is always an interesting release, given the importance of the consumer to the US economy. Building permits and housing starts will also be released ahead of the open on Friday. The bulk of companies may have already reporting numbers for the fourth quarter but there are still some more to come today, with 13 due to release earnings including Coca Cola and Kraft Heinz.

US Bond Auction TIPS the dollar

Sterling Resilient After Poor Retail Sales Figures

UK retail sales data for January was once again disappointing, providing further evidence that the post-Brexit squeeze on consumers is heaving an economic impact. While this could be partially reversed as sterling continues to rebound off its lows and wage growth picks up to offset higher living costs – assuming it does – we’re seeing few signs that the squeeze is easing and that’s being reflected in the spending figures.

The pound has actually been quite resilient to the data in the aftermath of the release. While it has since declined against the dollar, this has primarily been driven by the bounce in the greenback. The consumer squeeze and economic implications of it are already known and priced in, traders are far more concerned with wages and inflation and the impact this will have on interest rates, which makes the jobs report next Wednesday far more important.

GBPUSD Daily Chart

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Bitcoin Struggling to Overcome Psychological Barrier

Bitcoin is once again threatening the psychological $10,000 barrier but as was the case on Thursday, it’s struggling to maintain its push above and once again finds itself falling slightly short. While a break above $10,000 should be no more significant than any other, it would appear to represent an end to the plunge in bitcoin that saw it fall around 70% from its mid-December highs and for this reason, it’s proving a difficult hurdle to overcome.

Bitcoin (CME) Daily Chart

Source – Thomson Reuters Eikon

Those expecting a similar response to breaking above $10,000 that we saw last time – a near 100% increase in less than three weeks – may also be disappointed. We’re not seeing the kind of euphoria that accompanied the break at the end of November when the speculative fomo trade was contributing greatly to its meteoric rise. The crash of the last couple of months has made this less of a one-way move and those that got burned may not be so keen to jump back in.

DAX Gains Ground as Dollar Under Pressure

All of this is assuming that bitcoin will break above $10,000 which is far from certain when you consider the gradual – by its own standard – bounce from its lows. This could quite easily be another corrective move and the lows may be tested once again. The absence of a constant negative news flow is helping but whether this can be sustained is debatable.

Economic Calendar

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

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.