IFX Market Report
Thursday 16th February 2017

Market Report

Labour market data released by the Office of National Statistics (ONS) yesterday showed that the UK unemployment rate held at 11-year lows of 4.8% in the final quarter of 2016. Nevertheless although average earnings still increased beyond the rate of inflation, the metric dropped from 2.8% in November to 2.6% in December. Unfortunately many analysts forecast inflation to spiral beyond the BoE's 2% target to as far as 3% this year, which (if unsupported by earnings) will diminish the disposable income of the UK consumer. An ONS statistician said, the labour market; “appears to be edging towards full capacity”.

Sterling data was mixed yesterday, although the performance of GBP showed that the average earnings index was where the trader-focus was. The claimant count change was impressive but the unemployment rate still remained at 4.8%, the same as the previous reading. Its direction today will be decided by the EUR and USD releases, as the GBP is taking a break today with no economic data due on the docket. Complacency is criminal, in a market which has been Brexit-light of late and UK uncertainty appears to have been ‘priced-out’ for some time. As we well know, Brexit fear-mongering has been the scratch that journalists can’t stop themselves itching and although a wave of optimism appears to be sweeping over Sterling traders recently, we know that the next ‘news cycle’ may not be so sanguine.

GBPEUR traded lower yesterday, off the back of worse average earnings data released yesterday morning and the GBP edged back down towards the levels we saw it enter the week. The claimant count change is a reduction in new people filing for unemployment, which dropped to -42.4k, much better than the expected 1.1k increase that was forecast, although not sufficient to push this pairing higher. Today we see the GBP/EUR sitting at 1.1750.

GBPUSD, the GBP traded in a choopy range yesterday, with a slight bias to the upside versus the Dollar, even after CPI and retail sales data from the USA posted strong results. Later the Capacity utilization rate and industrial production figure out of the U.S. did disappoint but why did the pound traded poorly against the EUR but better against the Dollar, when the USD had a strong day of releases and the EUR had no data, is testament to the times.

Worldwide News

Inflation in the United States has risen at the fastest rate since 2012, as yesterday at 13:30 the Consumer Price Index (CPI) measure of inflation hit 2.5% in January, when compared to a year previous. The core measure (that excludes volatile priced food and energy) was marginally higher at 2.3% from 2.2%, however the 7.8% spike in gasoline prices caused the majority of the price increase.

Further to this, also at 13:30 yesterday afternoon the U.S. released their data for retail sales in the month of January. U.S. Retail sales spiked beyond forecasts of a 0.1% increase and hit 0.4% last month, as U.S. consumers increased their purchases of household goods (electronics, white goods and appliances) as well as increasing their spend on leisure activities (dining out, sporting goods and hobbies). Janet Yellen signaled to U.S. lawmakers on Tuesday that increases in interest rates may be required if inflation picks up this year and the labour market remains supported.

At midday yesterday, EURUSD languished 2.93% below the February 2nd high of 1.0829 at 1.0521, the pair then saw a solid recovery in the afternoon as EURUSD traders ‘took profit’ from their short positions. Many city currency traders currently feel that the USD is overvalued and the EUR is hugely oversold at present and accordingly the markets corrected yesterday. The EUR sitting as low as it has, especially in the wake of a positive economic release earlier in the week showing all member states are predicted to show growth through to 2018, became attractive to buyers. The USD although a march hike is still on the table, it is only a suggestion and it’s is not March yet. Today we see EURUSD trading 1.07% above yesterday’s low at 1.0634.

While It’s exceptionally easy to shout “profit taking” when a currency moves against the data and has been trading at lofty levels for a while, however there is always the possibility that there is slightly more behind it. Firstly the fact that the retail sales data, although favourable, appears to have been boosted by higher prices rather than an increase in consumption. Secondly, that the markets are, in general, reacting more cautiously at present as there is so much uncertainty in the immediate future. Finally that during Yellen’s second day of questioning she offered no additional timeline for when the hikes will begin. The USD has Building permits, Philly Fed, and Unemployment data ahead today. While on the Euro side of the pair, we have Trade balance for Spain and ECB monetary Policy Meeting Minutes to dictate direction.

While the Aussie Dollar is rarely a topic of our market reports, yesterday the antipodean currency was a top performer, climbing against most majors. Influencing factors in recent AUD strength have come from rising commodity prices and solid employment data recently. Furthermore, a record trade balance released last week and this week’s positive data, out of China regarding inflation. It has started to soften this morning in light of oil prices, as OPEC restrictions have done well to raise oil prices but the increase in drilling and oversupply that the USA has, is starting to weigh on the price of oil. GBPAUD was trading at 1.7803 in September 2016, but now trades 9.72% lower at 1.6226.