Finding and acting on ‘evidence’ in this type of market, apathy and liquidity constraints, is not easy. It seems that a collection of things is making it difficult for an investor to pull that capital market position trigger. The prospect of the US Fed reducing its bond-buying program next month continues to play on their minds. With little in the way of fresh impetus, until most of the markets pricing moves across the Atlantic to the US, investors have been weighing up yesterday’s encouraging Euro-zone growth figures against Fed Bullard’s comments that there could be risks of excessive future inflation.
Initially, US equities yesterday did not care much for Bullard’s inflation comments, however, he redeemed himself somewhat by indicating that the Fed requires more economic data points before ‘deciding whether to pull back on its easing efforts.’ With most of Europe respecting Assumption day today, market sentiment should remain mixed until investors can get a better handle on the US’s inflation landscape with today’s CPI release. Investors will also be entertained by another Fed Bullard speech, the Philly Fed survey and the usual US weekly claims numbers.
With a percentage of investors continually obsessed on the timing of Fed tapering, each piece of Tier 1 data point that comes in close to expectations, or if not better than consensus, should pull taper expectations closer towards next months FOMC meeting. What does that do for the ‘mighty dollar’? Currently, it seems the risks favor the dollar – the probability of tapering likely falls less on a below-consensus core inflation reading this morning than it rises on a strong one.
Investors will have to pay close attention to the US yield curve, and in particular the 10-year benchmark bond whose implied return hovers close to +2.72%. If any upcoming data strengthens views that US growth will speed up in 2H, the bond bears would likely want to take control again and lift US 10-year yields through this psychological threshold. Under these conditions the market should be expecting the USD to follow. The Fed would likely start tapering and the safer haven fixed-income market would need much higher interest rates to renew investor-buying interest – again, all good for the dollar.
Sterling is the high flyer of note so far today. UK retail sales has continued the trend of above forecast data and posted yet another strong headline print (+1.1% vs. expectations of +0.6%). The good summer weather is to blame for the stellar print combined with heavy high street discounting. The report has the futures market trading lower and will only increase the pressure on the MPC to deliver more forward guidance. As noted yesterday, Governor Carney does not yet have unanimous support from all his fellow colleagues. He continues to do battle on two fronts – within and with the market. Last months meeting was accompanied with a clear statement that the market had got ahead of itself in terms of possible tightening. Futures prices are now 275 ticks lower since then.
GBP has been boosted by the near double sales forecast. The report is probably good news for any hawk. Expect them to be anticipating a UK bank rate hike as early as next year. Asian account supply has thus far helped to cap GBP/USD at a two month high of 1.5589. Option barriers remain tipped at 1.56 with some offers hoping to presell. The tech analysts fear that a figure break above with momentum would increase the risk of a looming test of June’s high 1.5753. Dip buying of cable will now be in vogue with 1.5556 being the first line of defense, the pre-UK retail sales high.
The UK’s borrowing costs rising to a two-year high at the sale of ₤2.25b long bonds (+3.32%) this morning is also aiding sterling’s move higher. Yields on other UK government bonds have been climbing in recent weeks amid signs of faster economic growth and less support from Carney and company for keeping monetary policy accommodative.
EUR’s Risk Is To The Downside
Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX