Last night's US Federal Reserve meeting, Janet Yellen’s last as Fed chair, appears to have teed up the March meeting quite nicely for the next move in the Fed funds rate by another 25 basis points.
One of Jerome Powell’s first tasks as new Fed chief is likely to be to raise interest rates against a backdrop of a strengthening inflation outlook and robust jobs market.
The FOMC upgraded its outlook for inflation on a 12-month basis saying that they expected it to increase and stabilise around the 2% level this year. All the while the Fed will continue to reduce the size of its balance sheet on a monthly basis.
US stocks took last night’s decision in their stride closing modestly higher, reversing two days of declines, but still posting their best start to a year since 1987, with the S&P 500 closing higher for the 15th month in a row, equalling a run of monthly gains last seen back in 1959.
US treasury yields, which earlier this week had prompted some skittishness amongst investors about a sharp rise in interest rates, did post new multi-year highs, with the 10 year hitting 2.75% before edging back to close slightly lower.
The US dollar index had an indifferent session, despite some pretty positive economic data, to go with last night’s slightly hawkish Fed tilt, as it posted its worst one of its worst starts to the year in 30 years.
While US markets broke record after record in January the performance of markets in Europe as slightly more nuanced. Despite seeing new record highs for the FTSE100 and DAX in January the FTSE100 lost ground while the DAX finished well off its peaks.
The strength of both the pound and the euro would appear to be acting as a bit of a headwind for both, with the pound posting its best month against the US dollar this decade.
Expectations of an improving economic outlook and tighter monetary policy are helping drive the gains in both despite expectations of further US rate rises, and as we head into February and the end of the week we should get further confirmation of some fairly solid economic numbers.
Manufacturing PMI’s for January from Spain, Italy, France and Germany are all expected to point to a continuation of the solid themes of 2017 with expectations of 55.7, 57.7, 58.1 and 61.2 respectively, following on from decent numbers out of Japan and China in Asia earlier today with Japanese manufacturing coming in at its highest level in nearly 4 years.
It’s expected to be a similar story in the UK with a manufacturing PMI of 56.5, up from 56.3 in December. Earlier this month manufacturing output was reported at a ten year high, and though we did see a drop in car manufacturing output earlier this week this appears to be more as a result of some uncertainty over government policy on diesel cars, as well as a slower domestic market.
In the US it’s expected to be a similar story with ISM manufacturing expected to come in at 58.7, slightly down from December’s 59.7, though particular attention should be focussed on prices paid which is still estimated to be up in the high 60’s, at 68.3, down from 69. The puzzle here is why these high inflationary numbers aren’t being reflected in the headline inflation numbers.
EUR/USD – we still have support at the 1.2320 area but are currently struggling to retake the 1.2500 area. The uptrend continues to remain intact while above this key support, but we need to take out last week’s high at 1.2550 to bring 1.2600 the 61.8% retracement level of the 1.3995/1.0340 down move into view.
GBP/USD – found support at 1.3980 this week before rebounding strongly back above the 1.4200 area. A move back through the recent highs at 1.4340, targets the 1.4590 area. Below 1.3970 targets the 1.3850 area.
EUR/GBP – continues to find the air a little thin above the 0.8810 area and remains at risk of a move back to the recent lows at 0.8690. A move through 0.8830 retargets the 0.8900 area, while a move below 0.8690 targets 0.8640.
USD/JPY – finding some support around the 108.40 area but needs to move back above the 110.20 area to stabilise or risk further losses towards the 107.30 area and September lows.
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