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Economic data provides rate hike hope

The interest rate futures market is now certain that here will be a rate hike in the U.S. next month as the employment report produced its usual jamboree over the headline, but it was the support act in the shape of wages growth that stole the limelight.

The headline +200k new jobs was as expected by a jump from 2.6% to 2.9% in growth
in average hourly earnings came as a major surprise.

However as has become the norm in the market recently this result was not greeted by a huge rally for the dollar since it faces other headwinds, in particular the political disagreement surrounding the future path for the dollar. Despite President Trump wanting a strong dollar“eventually”, he is driven on by the fact that he cannot abide seeing his country taken advantage of, by what he calls, currency manipulators.

However, since those currency manipulators, in the main, are the largest buyers of U.S.
debt, he is not in the most advantageous position to berate, in particular China. Japan has got away, for some time, with manipulating its currency although it has now desisted from actively intervening in the currency market. The dollar’s fall versus the Euro should have convinced the President that Germany is no longer a currency manipulator.

Sterling continues to dance to several tunes.

Being a Sterling trader has never been the easiest position in the dealing room. The
factors that the pound faces and its often-varied reaction bring perils to holding a position that simply don’t apply to other major currencies.

Over recent months, the credibility of the Bank of England has been added to those factors
as the rate hike last November continues to be questioned. Now, following Mark Carney’s testimony to MP’ last week a further rate hike possibly as soon as May with another later in the year is being discussed. Did anyone see the construction data last week which came close to contraction?

The economy is in sufficiently parlous condition that a rate hike should be out of the question but given how high inflation remains, nothing is off the table. BoE Governor Mark Carney will face the press following this week’s MPC meeting where attention is likely to fall on the Quarterly inflation report that will also be released on Thursday. That report is likely to continue its rhetoric
concerning a slow fall in prices and Sterling continues its post-referendum
fall but Carney is also looking wage inflation starting to pick up which has piqued the attention of rate hawks.

Euro remains reactive despite political concerns.

This time last year it was France and the Netherlands, this year it will be Italy and Germany. No matter how well the Eurozone performs economically it will always be on the verge of political unrest as the constituent countries hold their elections over a four/five-year period.

The Eurozone and wider EU are both political unions first and foremost with the merger of economic, not fiscal policy a difficult issue that has been admirably handled by current ECB President Mario Draghi admirably. The dilemma of a strong currency choking off growth in some of the weaker economies continues to exercise Sr. Draghi. However, it is the wider political situation in Germany where a Grand coalition is proving elusive and Italy where anti-Eu tubthumping is having some success that bring concern to EU watchers.

In Germany the self-imposed deadline Merkel and Schultz imposed upon themselves expired
yesterday with no agreement. Schultz is in a difficult situation, He would sign the agreement today, but his Party want to go into opposition where they feel they will have more influence that as junior members of a coalition run by a long-established Chancellor.

In Italy, the current leader in the polls, Matteo Silvini has called on Brussels to apologize for the abuse Italy received at the time of the Financial Crisis. It seems that Brussels could face another Brexit type issue if Silvini in partnership with Silvio Berlusconi, who has made a remarkable comeback, wins on March 3

 

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