IFX Market Report
Wednesday 8th February 2017

Market Report

Sterling rallied yesterday afternoon, after the Bank of England's Kristin Forbes, said that the UK economy may soon need a rate increase. The Monetary Policy Committee member who joined in 2014 gave a speech in Leeds in which she said; ‘In my view, if the real economy remains solid and the pick-up in the nominal data continues, this could soon suggest an increase in the bank rate,’.

This morning in UK stock markets, the blue-chip FTSE 100 index is holding flat at 7,179.29 regardless of significant gains in the mining sector. Rio Tinto (RIO) is already up 2.65% after announcing a larger than expected dividend, while Anglo-American (AAL) and Glencore (GLEN) are also in the top-five risers this morning. Mining stocks have posted a decent recovery recently as commodity prices, especially precious metals begin to rally.

In the second day of Brexit negotiations, a hard-line stance has emerged which states that there will be ‘no re-negotiation of the Brexit deal if after presented to parliament, parliament rejects it’. This is either a very clever or a very stupid move, clever in that it means anyone opposing the proposed plan, will be making a purely symbolic gesture, taking a stand against what they do not believe in, but potentially shooting themselves in the foot as if the vote rejecting wins then no deal exists and WTO (World Trade Organisation) terms would be implemented. Most believe these terms would be deeply damaging to the UK. This is also why this stance could be stupid as it is obvious that this is a bullying tactic to limit votes against the proposed bill, and that action in itself could leave Theresa with egg on her face, if parliamentary resistance is stronger than she plans to encounter. Already we saw seven conservative lawmakers join forces with rival parties but the government still won the vote yesterday 326 to 293. The gap narrows and talks of a Scottish referendum are getting ever louder.

GBPEUR had a choppy day’s trade as a climb to just under 1.165 and then a drop to back under 1.16 signaled to most that this may be the new 1.175 resistance level of last week, affirming beliefs that the GBP will be losing strength in the build up to article 50. Then, out of nowhere, the pound jumped to over 1.17 where it still sits now, after Kristen Forbes (an external member of the MPC) who started talking in favour of interest rate hikes and the pound rallied instantly.

GBPUSD as with GBPEUR yesterday, the strengthening of sterling against the USD was also caused by rhetoric from MPC member Kristin Forbes, although the pair was further supported by the JOLTS Job Openings slightly missing its 5.56m forecast with a reading of 5.5m. We have the GBP/USD presently at just over 1.25 and it will be interesting to see if it can remain at this level after MPC member Jon Cunliffe speaks.

Today we have a better known MPC member Jon Cunliffe speaking, who I am sure will not be echoing Kristin Forbes’ comments. He is speaking at 1pm and markets forecast a far more ‘dovish’ tone from him.

Worldwide News

The EUR is being hit by election uncertainty at present, however the focus appears to be on the French election which is due 23/04/2017 while the Dutch election is only five weeks away on the 16/03/2017. There is a substantiated fear of far-right ‘populist’ politics taking hold of Europe, and accordingly the Dutch Election should be watched as a priority, the front-runner is Geer Wilders, a publicly anti-Islam leader of the far-right ‘party for freedom’. He has promised to close borders, shut down mosques and mirrors le pens stance of leaving the EU. I am sure when more of the public become more aware of this, the EUR will further weaken.

The USD has of late not been ‘data dependent’ however has traded on the perceived, strength or weakness of Trump’s protectionism and fiscal policies. The most recent employment data on Friday did show an uptick in Non-Farms but was matched with a decline in hourly earnings and an increase in unemployment. What followed was Manufacturing and Factory orders also missing the mark. This makes yesterday’s stance by FOMC Member Harker seem even more preposterous, when he stated that March should be considered for a rate hike.

EURUSD The European elections are starting to get some media attention now and the EUR is dropping in anticipation (presently 1.0652). Right wing politics are clearly gaining traction and the hurdles that are in Le Pen’s way are yet to fall, but are certainly being dropped to a more manageable height. Opposition Conservative challenger Francois Fillon has been hit with a financial scandal causing him to lose ground to Emanuel Macron and anti-EU National Front Leader Le Pen. With little in the way of Economic data today, expect newspaper sensationalism to grab attention and the EUR to potentially continue to weaken as more become aware of the developing political situation. EURUSD is currently 1.06% below the opening rate of the week at 1.0652.

The Indian central bank, the Reserve Bank of India (RBI) have at 09:00 this morning held their key interest rate at 6.25% amid speculation of a 25 basis-point cut. Vivek Rajpal who works in India for Japanese Investment bank Nomura has said that whether the RBI cut or not the “RBI is reaching end of easing cycle”.