Last week was a relatively subdued few days in the FX markets, despite a number of anticipated market and political events. Sterling overall had a positive week, GBPUSD closing above 1.3850 and EURGBP below 0.89, as resilient UK data outshone Brexit rumblings. Markets are waiting to see what develops in the lead up to next week’s EU summit, which is the next expected Brexit event.
The market continues to digest President Trump’s rhetoric about trade, and only time will tell what he will do and the effect that it will have. On a more positive note, his outreach to North Korea could be an important stabilising factor in that region.
Global equity markets ended the week higher led by Europe after a moderate softening of the US’s stance on trade helped ease concerns of an imminent acceleration of trade tariffs. Meanwhile, after the USD initially rallied on Friday’s US employment as payrolls showed robust growth in the US, the USD subsequently sold off as investors contemplated weaker than expected wage growth.
Elsewhere, JPY and Asian equities pared their gains overnight as Japan’s Ministry of Finance admitted to altering key documents related to the sale of publicly owned land to a nationalist private school before submitting them to parliament. JPY recovered marginally after Finance Minister Aso commented that he will not be resigning.
In Friday’s US employment report, February payroll growth surprised to the upside at 313k but wage growth came in lower than expected at 2.6% y/y, reversing last month’s gains.
Whilst this may reduce the urgency for an aggressive hiking cycle as the Fed seeks to contain inflation, Barclays Research thinks that “… the March FOMC meeting is likely to simply show a strong support for three hikes this year, which is already priced in…”
Looking to the week ahead, trade and politics will likely remain the key market drivers this week given the lack of major data releases and central bank meetings. On the central bank side, we expect both the SNB and Norges Bank to keep policy on hold at their policy meetings on Thursday.
While risks of a trade war seem to have abated with the Trump administration’s decision to exempt Canada and Mexico from its steel and aluminum tariffs, any steps towards it would likely weigh on trade and risk-sensitive currencies and likely to benefit safe havens, including the USD in particular.