Fed rate hike binary – 0 or 1 in 2019.
February 21, 2019
Sterling continues to fluctuate with little Brexit news forthcoming. Yesterday saw 3 Tory MP’s defect the ruling party to join The Independent Group, lifting the levels of MPs to 11 – the same size as the Liberal Democrats. Meanwhile, rating agency Fitch cautioned that it may cut the UK’s sovereign rating from AA in the event of a no-deal Brexit. Fitch is next pencilled in for a sovereign rating announcement for the UK on April 26th, along with Standard & Poors. The latest developments just add to the negative threats for the UK economy in the event of a no-deal Brexit, which could be legally ruled out next Wednesday by Yvette Cooper’s second proposed amendment. This morning, comments from Phillip Hammond, the Chancellor of the Exchequer, have sent sterling on the offensive. Hammond claimed that the possibility of a no-deal Brexit has forced some MP’s to reconsider the Brexit deal, but with 116 MP’s needed to push the deal across the line, the headlines look flimsy at best.
The euro won the prize for most reliable currency yesterday after it ended up bang in the middle of the G10 currency board, with little extreme swings in either direction. The European Commission’s Consumer Confidence gauge for February came in slightly better than expected at -7.4 points for the euro area. This continues to be well above long term averages of this measurement, indicating that consumer spending may be able to prove a counterbalance to external threats and the slowdown in the manufacturing sector. Throughout the morning Flash Services Purchasing Manager Indicators are released, starting with the French and German editions, eventually culminating in a Eurozone-wide reading at 9:00 GMT. After which, meeting accounts from the latest ECB decision will be released at 12:30 GMT where insight on the downgrade in risks from broadly balanced to tilted to the downside will be sought after.
Yesterday, the dollar index closed marginally lower after correcting earlier losses later in the session. Surprisingly, the release of the Federal Open Market Committee minutes of the January meeting did little to scare dollar bulls, despite increasingly dovish tones spreading across Fed members. Continued uncertainty over future interest rate hikes keeps being aired from Fed officials while balance sheet run-off looks set to end in 2019. Regardless, the market reaction seems fairly muted as investors have already had time to adjust their expectations towards further monetary policy accommodation. Higher profile news came from US-China trade talks, where several memorandums of understanding are creating the base of a final trade deal, covering main areas like agriculture, services, technology transfer and intellectual property. Today might prove another volatile session, with Durable Goods Orders being released at 13:30 GMT and Markit PMIs at 14:45.
The loonie continued to gain ground against the US dollar yesterday as oil prices threaten to reach $60 a barrel in the near future. Despite oil prices continuing to firm, uncertainty over inventory data, which is released today instead of Wednesday due to the Monday bank holiday, has stemmed any loonie strength this morning. USDCAD floats upwards, despite the dollar index continuing to take on water.