Asian equity markets recovered from a three day sell-off overnight following a late rally in US equities, which saw the S&P 500 end January with the best start to the year since 1997. The USD strengthened against major currencies whilst 10y UST yields remained near the highest level since 2014 after the Fed acknowledged stronger growth with heightened confidence that inflation will rise to the 2% target, setting the stage for a March interest-rate hike.
Elsewhere in FX, USDCNY fell to its lowest level after the People’s Bank of China fixed the currency to the lowest level since 2015.
In the FOMC’s January statement, the Fed unanimously kept policy unchanged in an outcome that was widely expected. The Fed “…expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate…” which opens the door to four hikes in 2018, in our view. We continue to expect the Fed to hike by 25bp in March, June, September and December.
GBP had a choppy day yesterday declining on further Brexit concerns after a trade deal for the UK financial sector was rejected, but later it reversed its losses on month-end flow.
GBPUSD price action remains aggressive this morning as the pair rallied above 1.4250; our traders see support at 1.4120 and 1.3980 with resistance at 1.4350.
In EM, the Bank of Thailand turned incrementally more positive on growth, raising its growth forecasts for 2017 and 2018; but we continue to expect it to refrain from raising rates in 2018.
Today’s key data will be global manufacturing PMIs. In the US we expect the ISM manufacturing index to edge lower to 59.0, still firmly in expansionary territory. In the euro area, the “flash” reading of PMIs pointed to continued strength in activity. Despite this, euro area headline inflation eased to 1.3% y/y in yesterday’s release, while core edged up 0.1pp to 1.0% y/y.