HomeContributorsFundamental AnalysisDiffuse News Flow Confines USD Trading to Tight Ranges

Diffuse News Flow Confines USD Trading to Tight Ranges

  • European equity markets currently trade with small losses, recovering somewhat after the ECB meeting. US stock markets open with limited gains.
  • Businesses across the euro zone are ending 2017 on a near seven-year high, with demand and price pressures picking up and forward-looking indicators pointing to a busy start to 2018. The EMU composite PMI climbed to 58.0 this month, its highest since February 2011 and beating the 57.2 forecast.
  • Black Friday gave UK retailers a stronger-than-expected boost last month as discounts spurred Britons to snap up electrical appliances and other household products. The volume of goods sold in stores and online jumped 1.1% from October, the most in seven months. Sales excluding auto fuel rose 1.2%.
  • US retail sales rose more than forecast in November (0.8% M/M from an upwardly revised 0.5% M/M). Core retail sales and the retail control group (which feeds into GDP) also rose by 0.8% M/M from upward revision to 0.4% M/M in October. US weekly jobless claims unexpectedly dropped to 225k, remaining near historically low levels.
  • The ECB kept its policy rates unchanged as expected. The forward guidance on asset purchases and interest rates also remained the same. The central bank significantly raised the economic outlook in its new projections, citing greater confidence in the recovery. New inflation forecasts remain rather low though.
  • Bank of England policy makers left interest rates unchanged, moving into a holding pattern after November saw their first hike in a decade. The MPC reiterated that "further modest increases" would probably be needed over the next few years if the economy performed as expected, without providing additional detail on the timing.
  • The Norges Bank kept its policy rate unchanged at 0.5%. EUR/NOK declined from 9.85 to 9.75 as the central bank said in its monetary assessment report that "on the whole, the changes in the outlook and the balance of risks imply a somewhat earlier increase in the key policy rate." The central bank referred to "after autumn 2018".
  • The Swiss National Bank expects inflation in Switzerland to exceed its target in three years -an indication of when it might exit its ultra-loose monetary policy. The SNB kept that policy in place, saying the Swiss franc weakened this year but remained"highly valued".
  • Turkey’s central bank raised the highest of the four interest rates it uses to set policy by a less-than-expected 50 bps, its first rate hike in eight months after inflation hit a 14-year peak last month. The Turkish lire tumbled with EUR/TRY rising from 4.5 to 4.6.

Rates

ECB lifts growth outlook, but hushes on inflation

Global core bonds lost ground today with US Treasuries underperforming German Bunds. Last night’s sell-the-rumour, buy-the-fact reaction on the Fed’s well-flagged rate hike proved to be short-lived. The central bank still intends to continue its tightening cycle in coming years, which is far from discounted in markets. EMU (December PMI survey) and US (November retail sales; weekly jobless claims) printed very strong. They added to bearish bond sentiment without having a direct impact. The ECB kept policy unchanged, but significantly upgraded its growth outlook, inflicting additional losses on the Bund. Dovishness on inflation limited the downside though. Overall, we think that losses could have been bigger given developments today and last night.

At the time of writing, changes on the US yield curve rise by 1.5 bps (30-yr) to 3.9 bps (5-yr). The German yield curve shifts 0.2 bps (30-yr) to 3 bps (5-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrow up to 5 bps (Spain/Portugal) with Greece outperforming (-12 bps).

The ECB kept its policy rates unchanged as expected. The forward guidance on asset purchases and interest rates also remained the same. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases. There was no discussion on cutting this link. The GC confirmed that from January 2018 it intends to continue to make net asset purchases under the asset purchase programme (APP), at a monthly pace of €30 bn, until the end of September 2018, or beyond, if necessary, and in any case until the GC sees a sustained adjustment in the path of inflation consistent with its inflation aim.

The ECB significantly raised the economic outlook in its new projections, citing greater confidence in the recovery. The central bank forecasts above trend growth in 2017 (2.4% from 2.2%), 2018 (2.3% from 1.8%), 2019 (1.9% from 1.7%) and 2020 (1.7%). Risks for this scenario are broadly balanced. Downside risks are mainly related to global factors and developments in FX markets. The central bank expects that the output gap will close in the course of next year. There has been a "significant" reduction in economic slack, which is an upgrade from the October assessment of a "gradual" reduction.

The strong economic momentum signals that inflation will pick up, but the ECB judges that an ample degree of monetary stimulus is therefore still needed. Headline CPI is likely to moderate in coming months because of the evolution in energy prices before gaining upward momentum. Core inflation is expected to rise gradually over the medium term. New inflation forecasts remain rather low though despite the upbeat economic outlook and despite the ECB’s increasing confidence that inflation will return to target. The new forecasts (especially for 2020) give Draghi enough room to manoeuver and defend the current easy monetary policy stance. The ECB expects inflation to average 1.5% in 2017 (from 1.5%), 1.4% in 2018 (from 1.2%), 1.5% in 2019 (from 1.5%) and 1.7% in 2020. Muted wage growth keeps the ECB cautious.

Currencies

Diffuse news flow confines USD trading to tight ranges

There was plenty of eco and central bank news to guide global FX trading today. However, no theme succeeded to dominate trading. Eco data were strong both in the US and in EMU. The ECB also failed to bring a straightforward story to give euro trading a clear direction. EUR/USD trades currently slightly north of 1.18 area. USD/JPY hovers in the 112.60.70 area.

Asian equities opened mixed overnight, but ceded gradually ground. Chinese data printed close to expectations. The PBOC raised the rate for some reverse-repurchases, confirming its intention to curb (excessive) leverage. The dollar stabilized after yesterday’s setback. EUR/USD traded in the 1.1825 area. USD/JPY changed hands in the 112.60/70 going into the start of European trading.

European markets initially didn’t know how to react to yesterday’s developments in the US. European PMI’s (both manufacturing and services) confirmed that the EU economy is firing on all cylinders, moving higher from already exceptional levels. Core bond yields drifted gradually back north after yesterday’s correction in the US. Interest rate differentials between the US and Europe remained slightly tighter compared to the levels on the screens yesterday before the Fed/CPI data. However they didn’t narrow any further. EUR/USD traded sideways in an extremely tight range, roughly between 1.1810/45 going into the ECB policy decision and the US retail sales data.

The ECB as expected left its policy unchanged. The ECB substantially raised the growth forecasts for 2017/2019, but the 2020 inflation forecast remained at a relatively soft 1.7%. The ECB president also said that the forward guidance was not discussed today, but it might become an issue in the coming months. At the same time of the start the ECB press conference, US retail sales printed much stronger than expected and US jobless claims declined to a very low 225 000. So, plenty of divergent information for EUR/USD traders. For now, the dollar wins on points. EUR/USD trades again in the low 1.18 area. However, the picture remains highly indecisive. USD/JPY tries to move away from the post-Fed overnight low, supported by strong EMU and US eco data. However, the move also fails to gain traction, probably as equities are struggling. The pair hovers in the 112.75 area. Conclusion: plenty of (mostly good) news, but no clear direction for the dollar.

BoE fails to guide sterling trading

As was the case for EUR/USD trading, there was also no unequivocal story to guide sterling trading. UK November retail sales beat the consensus by a wide margin, but had only a temporary positive impact on sterling. The BoE as expected left is policy unchanged. The Bank sees last week’s Brexit deal as reducing the chances of disorderly UK departure. However, the BoE also sees tentative signs that the economy might be slowing into the yearend. There were no specific indications that the BoE considers a next rate hike in the near/foreseeable future. UK PM May attends the EU summit in Brussels and tries to convince the 27 EU leaders to approve the proposal to move to the next stage of the negotiations. The deal is likely to be approved tomorrow. However, even in that scenario, plenty of hurdles will have to be removed. The conclusion for EUR/GBP is quite similar than to EUR/USD: plenty of interesting news but no clear story for sterling trading. EUR/GBP hovers around the 0.88 pivot. Cable trades in the 1.34 area.

KBC Bank
KBC Bankhttps://www.kbc.be/dealingroom
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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