Markets:
Moves on core bond markets and in EUR/USD was confined to extremely thin ranges ahead of tonight’s FOMC meeting. Bonds had a marginal downward bias (+1 bp in yield terms) via selling pressure in UK Gilts. US yields added another 6 bps across the curve. EUR/USD regained a small part of yesterday’s losses and heads towards 1.23. New weakness on stock markets could be at play as well. Brent crude oil extends its rebound to $68.50/barrel, the highest level since early February. Inventory data and fear about a hawkish shift by the US towards Iran underpin prices.
The Fed will hike its policy rate tonight, but we also expect changes to the dot plot. More specifically, we expect a higher estimation of the neutral rate (3% from 2.75%) and a potential shift already in 2018 (4 from 3) and/or 2019 dots. Markets partly frontrunned on the short term shift, but don’t anticipate a higher neutral rate. Therefore, we mainly expect a sell-off a the longer end of the US yield curve. The Fed’s gradual lowering of its neutral rate from 4.25% in 2012 to 2.75% worked as a cap above the US 10-yr yield. Reversing these dynamics lifts scope for higher long term yields, especially if we add the prospect that the US’ fiscal policy will lead to a significant increase in twin deficits in the longer run. Technically, 3.07% is KEY resistance. A higher neutral rate suggests that we might go for a test in coming days. Medium term, we position for a break higher. If our dots-scenario materializes, there is room for a ST USD rebound. EUR/USD 1.2155 is the first important support. A break opens the way to the 1.20 area. The gain in USD/JPY might be more modest than in USD/EUR.
Sterling maintained its constructive momentum today which started after the EU/UK transition agreement reached earlier this week. Brexit tensions are now moving more the background and the market focus turned to the UK eco data and the BoE. The UK labour market report was stronger than expected with solid job growth. UK average weekly earnings rose to 2.8% Y/Y, better than the 2.6% expected. The data keep the door open for the BoE to raise its policy rate at the May meeting. They might already give some more hints at tomorrow’s policy meeting. Sterling succeeded some further gains against the euro and the dollar. EUR/GBP filled bids in the 0.8725 area. The 0.8700/0.8688 support area is coming within reach. We still assume that more sterling gains below this support area will become more difficult. Cable rebounded north of 1.40.
News Headlines:
British workers’ overall pay rose at the fastest pace in more than two years during the three months to January (2.8% Y/Y), bolstering the chances that the BoE will raise borrowing costs in May. Wages excluding bonuses rose by 2.6% Y/Y. The ONS said the number of people in work grew by 168k (+84k expected) in the three months to January. The data also showed the unemployment rate edged back down to its four-decade low of 4.3%. The number of unemployment benefit claimants rose by 9,200 to 838,000 in February.
Former PM Berlusconi wants the centre-right to team up with the 5-Star Movement to form a government with a pre-determined agenda, La Repubblica newspaper reported.
Faced with mounting trade offensives from Washington, China is preparing to hit back with tit-for-tat tariffs aimed at President Trump’s support base, including levies targeting US agricultural exports from Farm Belt states, according to people familiar with the matter.
