It’s been another relatively calm start to trading on Tuesday, with European indices mixed early on and US futures a little lower as traders continue to lock in profits following what has been a strong rally over the last month.
The Fed’s blackout period and the build up to this week’s big data point – the US jobs report – has offered the opportunity for some reflection for investors. The last few weeks has seen the focus switch from Donald Trump’s plans to revitalise the US economy with tax cuts, substantial infrastructure spending and deregulation back to the Fed, partly because we still have little idea of what the former will entail and partly because the Fed suddenly decided to send a coordinated message that it plans to raise interest rates.
While Trump has been given a free pass for now, the Fed has become noticeably more hawkish, possibly driven by the markets insistence that it wouldn’t raise interest rates in March but also perhaps by Trump’s insistence that tax cuts will be “phenomenal” and spending substantial. The Fed is desperate not to fall behind the curve and with the data currently healthy, it seems they’re looking to capitalise at one of the upcoming meetings, probably March. While this would previously have spooked investors, it’s clear that healthy data combined with the prospect of major stimulus plans is enough to put any concerns at ease.
Having taken a breather on Friday, the US dollar is now trading higher again for a second session, albeit still falling shy of last week’s highs. With expectations so high ahead of the March meeting – and for the year as a whole with the probability of three hikes around 50% – I wonder how much longer the dollar can sustain these moves. A strong jobs report on Friday would surely give it another boost but I wonder whether expectations are getting a little too high all of a sudden. It’s strength has finally taken its toll on Gold – perhaps assisted by the slightly improved political situation in France and the Netherlands ahead of the elections there – and the yellow metal is looking vulnerable to a possible break below $1,220, which could trigger another move back towards $1,200 or $1,180.
The pound is coming under pressure again today, with May’s difficulty in passing the Brexit bill smoothly through the House of Lords – potentially leading to delays in triggering article 50 without concessions – and some weaker economic data appearing to weigh. It was inevitable that Brexit would start to take its toll eventually on the economy and some cracks are starting to appear, with the consumer being discouraged by higher prices. The BRC reported today that spending on non-essential items has fallen which could be a sign of things to come, potentially worrying considering how important the consumer is to the UK economy. The pound is currently testing 1.22 support against the US dollar with the next major level for the pair coming around 1.20, where it found support earlier this year.
For a look at all of today’s economic events, check out our economic calendar.
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