Market Review – Fundamental Perspective 15 January 2018

European equity markets retreated as the EUR extended a rally to the strongest level in more than three years. Meanwhile, the USD headed for a fourth day of losses against major G10 peers, whilst crude oil extended a rally on OPEC cuts. The Chinese yuan touched a two-year high after the People’s Bank of China raised the currency’s fixing to the strongest since May 2016.
In Germany, the preliminary talks between the CSU, CDU and SPD concluded with an agreement on Friday. Whilst this acts as the first step on the road to the Grand Coalition, a number of hurdles remain including the SPD party members vote on the final agreement on the 21 January.
A vote in favor would mean that formal ‘Grand Coalition’ talks could begin. If party delegates vote against the agreement, a change in SPD leadership could be a possibility.
US consumer prices surprised to the upside in December on Friday, as core CPI rose 0.3% m/m and headline CPI rose 0.1% m/m. Barclays Research thinks the report helps “…to confirm FOMC members’ suspicions that disinflation from 2017 will likely prove temporary…” and is consistent with our outlook for further normalization of Fed policy. We continue to expect four 25bp rate increases in 2018, with the next hike at the March meeting.
Friday’s US inflation print was not enough to sustain a USD rally, with EURUSD pushing higher on positive news from Germany’s coalition discussions after rallying on the ECB’s hawkish rhetoric last week. EURUSD broke through 1.2100 resistance (Bloomberg 2017 highs), which will act as key support now, as the pair trades above 1.2200 this morning. GBPUSD broke above 1.3660 resistance (Bloomberg 2017 highs) with momentum driven primarily by a soft USD and further catalyzed by headlines around a ‘soft Brexit’ over the weekend .
GBPUSD support now comes in 1.3660 (Bloomberg 2017 highs) ahead of 1.3600 and 1.3450, with resistance at 1.3800 and 1.4000. Meanwhile, EURGBP remains 0.8800-0.8925 range bound.

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