Market Review – Fundamental Perspective 16 January 2018

Global equities and fixed income saw a subdued session yesterday, with the US closed for Martin Luther King day. In FX, USD weakness and CNY strength were the major themes in a quiet session, as the CNY strengthened after the Bundesbank said that it would add China’s currency to its reserves. JPY halted a five-day advance amid a warning from Japan’s finance minister about excessively rapid moves in the currency market.
EURUSD extended its gains to just shy of 1.2300 on comments from ECB Governing Council member Hansson yesterday. Hansson, a well-known Hawk, considers the recent EUR appreciation as no threat to the inflation outlook and said the central bank could end its bond purchase scheme after September if the economy and inflation develops as expected. This comes after minutes of the ECB’s December meeting suggested growing appetite for revising the bank’s communication stance, fueling expectations that the ECB may withdraw its record policy stimulus sooner than expected.
USD demand from Corporates and leveraged accounts faded the EURUSD move quickly, whilst a breakdown of coalition talks in Germany took EURUSD lower on London open after the SPD voted against starting formal coalition talks with the CDU with a 21-8 majority. EURUSD supports is at 1.2200 and 1.2155 whilst resistances remains at 1.2300 and 1.2350.
In the UK, newly appointed MPC member Tenreyro commented that the Bank of England has “ample time” before it needs to consider raising interest rates after its first hike in more than a decade in November. However, Tenreyro also said it was possible that productivity growth - a key driver of the overall economy which can also help keep a lid on inflation - could be stronger than the Bank of England has predicted, which could provide the basis for further hikes.
GBP strengthened yesterday and GBPUSD traded above 1.3800, but stopped ahead of resistance at 1.3835 (pre-Brexit lows).
Focus turns to UK inflation data today were we are broadly in line with the consensus, forecasting inflation of 3.0% y/y and 2.5%y/y for headline and core inflation, respectively.

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