Morning Report: 25 January 2018

January 25, 2018

GBP Sterling benefited from yesterday’s broad USD weakness, but also made inroads against a wide range of currencies including the euro. Optimism about the nature of Brexit, combined with some solid labour market data, meant sterling was able to extend its gains overnight and into this morning, consistently making fresh post-Brexit highs against USD along the way. Although Unemployment and wage growth were essentially unchanged in yesterday’s release, the net rate of job creation broke a three month downwards trend, suggesting a burst of hiring in December. High Street Lending figures from UK Finance will be released at 09:30 GMT, followed by Retailing Reported Sales from the Confederation of British Industry at 11:00.

EUR The euro fell back to sterling yesterday, but made scorching progress against the US dollar, ahead of today’s crucial European Central Bank rate announcement and press conference. The last couple of weeks have seen the euro strengthen considerably after minutes from the ECB’s last meeting showed the Governing Council was beginning to consider its forward guidance. The euro strength was met with a classic ECB messaging effort, with anonymous sources reporting to Reuters that forward guidance would not be revised at this week’s meeting, and several senior ECB decision makers including Nowotny and Constancio expressing reservations about the euro’s strength. All of this suggests markets will be treated to a euro jawboning attempt by ECB President Mario Draghi today, although it’s doubtful how successful any attempts to talk down the euro will be, given the ECB cannot credibly threaten to loosen policy. The ECB’s latest decision will be released at 12:45 GMT, followed by a Press Conference at 13:30.

USD Yesterday saw some momentous, perhaps even seismic developments in the US dollar, which weakened across the board after Treasury Secretary Steve Mnuchin broke with decades of convention and expressed support for a weaker US dollar. Speaking at the World Economic Forum in Davos, Mnuchin said that a weak dollar would be “good for us as it related to trade and opportunities”. The offhand remark is significant despite not representing new information, or being an official policy, it marks a departure of unofficial messaging since Robert Rubin expressed a desire for a strong dollar in 1995, facing a bond market rout and soaring bond yields. From a fundamental perspective, the relatively loose monetary policy and expansionary fiscal policy currently pursued by the US is certainly conducive to currency weakness, so Mnuchin’s statements were taken to heart by markets. Also at Davos, Trade Secretary Wilbur Ross made a series of characteristically protectionist statements. Today will see a number of minor releases in the afternoon, including weekly Unemployment Claims and the Goods Trade Balance at 13:30 GMT, but the fallout from Mnhuchin’s statement is likely to continue to dominate USD.

CAD The loonie also advanced against USD yesterday and overnight, with NAFTA negotiations being overshadowed by statements from senior US policymakers at Davos. Today at 13:30 GMT Retail Sales data will be released, while NAFTA negotiations continue.

UK news

  • Reuters: UK Brexit minister to set out transition aims on Friday – BBC political editor. Brexit minister David Davis will set out Britain’s approach to a post-EU membership transition period, the BBC’s political editor said on Thursday. Davis will say that Britain wants to remain in deals such as the EU’s free trade deal with Canada after Brexit, Laura Kuenssberg said on Twitter.
  • Financial Times: US warns it will step up trade measures in 2018. Key members of the US government warned that America was preparing to intensify its measures to prevent what it sees as unfair trading practices around the world, but denied that this represented a slide towards a new form of “protectionism” which might damage the wider economy.

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