GBP data vs the market, CHINA and ECB in the spotlight
With Chinese Lunar New Year ahead, fears abound of contagion of the infection that has already killed 6. Davos headlines abound, and GBP is stronger despite terrible key data last week.
GBP: Stronger after today’s knee-jerk reaction to wage data which might imply upward pressure on wage inflation for the first time in a decade. However, terrible Retail Sales data (which included and showed weakness in) the critical December month, was released last week. Data this bad took the chances of a rate CUT in January from 60% to 72%.
With the bank of England increasing its rhetoric around a rate cut, the market will now be disappointed if this is NOT delivered at the end of the month. However, what is clear is the poor data and the prospect of 2020 being another year of Brexit negotiations.
GBP/USD at 1.3025 and GBP/EUR at 1.1750 sit near the top of recent ranges, but customers are seen selling into any up-moves.
EURO: German data (ZEW economic sentiment) was positive, and much-needed after a terrible end to the year, with Germany tickling the toes of a recession. France and Germany agreed not to enter a trade dispute – hardly a surprise given the mutual lack of economic fire-power – but a positive headline nonetheless! This week’s ECB interest rate decision (Thursday) will do very little to surprise markets (see below ING quotes).
USD: Encouraging news last week regarding the ‘Phase One’ trade deal between USA and China lifted the USD, but EUR/USD remains stuck in a range between 1.1025 and 1.1200 – the USD traded poorly through today’s session.
China: Last week saw the announcement that China was growing at the slowest rate in many years. It was notable that none of this was due to the tariff-war with USA, more emphasis was placed on internal issues around borrowing, and the ‘global headwinds’ that were hindering economic growth in traditional sectors.
The headlines are now focussed on the mystery infection, which can spread from human to human, and has claimed a 6th life. It’s presence in major Chinese conurbations is worrying, as is the risk of contagion, as the Lunar New Year approaches, and holiday travel brings obvious risks. The immediate impact on the luxury goods sector is well reported by Reuters in this link, with some astonishing facts about the importance of Chinese consumption of luxury goods:
https://www.reuters.com/article/us-china-health-pneumonia-luxury/china-virus-scare-sends-shudder-through-european-luxury-goods-sector-idUSKBN1ZK208?il=0
Perhaps this week’s Davos meeting will bring more volatility. Davos always brings headlines on a ‘large scale’ and FX markets will be looking for the Fed Chairman to shed some light on the future path of rates .. but in general, all markets will be looking for policy shifts.
CAD: A key day tomorrow with the rate announcement and press conference. CAD strength since Dec has taken the currency to recent high levels – if it continues to push though these, it will enter new, higher trading ranges.
Economists at ING had this analysis of the EURO:
““The January meeting of the European Central Bank should have a little impact on the euro. No new economic projections will be published and the board is unlikely to change its risk assessment. An official announcement that the bank is launching its strategic review has been well-flagged and is not likely to affect the euro materially either.”
“With euro rates deeply negative and little prospect of a turnaround in the near-term, the outlook for the euro remains unattractive and the currency is likely to continue to be used as the funding vehicle of choice for carry trades.”
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