STO Fundemental - Australia recession fears kicked into touch

It’s a relatively busy day for major economic releases with UK GDP, Eurozone inflation and FOMC meeting minutes all set for release. The latter could be the most influential on the basis that opinions are still divided as to whether a March rate hike makes sense. Any clarity here could provide fresh direction not only for the greenback, but also equities, too.

The STO Traders’ View


Our prop desk is showing enthusiasm for the pound ahead of that GDP release, with long GBP/AUD, long GBP/JPY and short EUR/GBP positions all in evidence.

Fundamentals – Australia recession fears kicked into touch

Last night’s comments by RBA Governor Phillip Lowe with talk of 3% GDP growth by 2019 served to push those recession fears yet further into the long grass. With no real prospect of a further rate cut in Australia, the Aussie dollar strengthened a little against the greenback, but perhaps most surprising is the fact that the quantum of the gain has - at least so far been relatively - limited. Further gains here would be of little surprise, especially towards 12 month highs around 0.7800.

We have the first revision to the UK Q4 GDP figure due for release at 9.30am GMT. Given the mixed bag of numbers we’ve seen over the last few weeks from London plus that very measured view on inflation from MPC member Andy Haldane, it’s perhaps surprising that cable managed to regain the 1.25 handle during the Asian session. Around these levels it’s difficult not to see the risk as being weighted on the downside, especially if we see any concern over the GDP print.

January’s Eurozone inflation print is slated for 10am GMT and the key risk here seems to be the potential for an overshoot. Mario Draghi remains committed to stimulus measures and the common currency remains very much on the back foot against the US dollar. Anything that calls into question the idea that the current inflationary pressures are temporary will pressure the ECB to take action. If this is seen, then a spike on EUR/USD - even if it’s short lived - would be no surprise.

The jury is still out as to whether the Federal Reserve will look to hike interest rates next month, so expect both the meeting minutes release at 7pm GMT and comments from FOMC member Jerome Powell an hour before this to be under scrutiny. Although a dovish slant here may knock the dollar, the more relevant point of discussion would be the impact on US equities. DOW futures are currently suggesting a slightly softer start to the day, but with the market still trending higher, any excuse to continue the buying spree could push the index out to fresh highs for the month.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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