G10 currencies stay in tight ranges as markets shrug off economic news

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27 February 2017

Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

G10 currencies continue to trade in very tight ranges, exhibiting low volatility amid traders’ unwillingness to place large bets on either direction.

F
ocus on central bank communications and macroeconomic news has given way to obsession over the political calendar. It is notable that neither the relatively hawkish Federal Reserve minutes from the January meeting, nor the strongest business sentiment index in the Eurozone since 2011 had a lasting impact on currency markets.

While elections in the Netherlands and France loom in the near horizon, by far the biggest risk event in the short term is Donald Trump’s speech to the joint session of the US Congress in the early hours of Wednesday morning. Any details or announcements regarding prospective tax policy or the increasingly remote prospects for significant infrastructure spending could potentially light a fire under the US Dollar. Eurozone flash inflation data on Thursday could also move the Euro.

The Mexican Peso had the best performance of any major currency last week, and it has now recovered essentially all of its losses since US election night last November. Last week’s trigger was the announcement of mild measures in support of the currency by the country’ central bank, Banxico. We remains skeptical that the rally can be sustained in the face of substantial uncertainty on Mexican trade and investment due to Trump’s unpredictable protectionism.

Major currencies in detail

GBP

Sterling’s appreciating trend against the Euro continued last week on the back of an upward revision to fourth quarter GDP growth and increasing jitters about the French election. We think the market is, in general, currently overestimating the chances of a Le Pen victory.

This week we expect the PMI business sentiment indices to follow the Eurozone’s lead and surprise to the upside, which will help dissipate doubts over the short-term health of the UK economy and buoy the Pound. Fresh concerns that the Scottish Parliament may try and force through a second independence referendum could, however, keep Sterling on the back foot in the coming days.

EUR

Last week we saw significant positive surprises in the key PMI business sentiment indices across the major economies of the Eurozone. Germany has now the highest PMI of any major economy, and France’s is now at a 70 month high. This is the most significant advance indicator of the state of the European economy, and it is pointing clearly towards an acceleration for growth in the near term.

However, the market remains transfixed with the latest polls on the French election, and to a lesser extent the Dutch one. Only an explicit acknowledgement on the part of the ECB that conditions have indeed improved will have a lasting impact on the currency and we think this is still many months away.

USD

The Fed minutes released last week explicitly stated that additional hikes are coming “fairly soon”. Interest rate markets appear to interpret this as a May/June rate hike for now, but we think the chances of a March hike are still underpriced, given recent positive surprises in the labor market and the jump in core and headline inflation.

This week is exceptionally rich in political events and macroeconomic news out of the US. On Tuesday, Trump addresses the joint session of the US Congress. There is little expectation that he will flesh out tax cuts and infrastructure spending proposals, so markets are vulnerable to a surprise here which would almost certainly support the Dollar.

We are looking forward to the publication of durable goods orders and personal income data, however we will have to wait for the NFP report until the next week. We expect a continuation of the positive tone in economic news that we have seen in the last two months. Finally, on Friday Fed Chair Yellen will give the last speech on monetary policy before the blackout period prior to the March FOMC meeting. We foresee a lot of volatility around this news and significant potential for the Dollar to end the week higher than it began.