STO Fundemental - Fed rate hike looks imminent

Great promises from the US President over infrastructure spending, combined with a hawkish tone at the Fed, has been lending support simultaneously to the greenback and US equities. US treasury yields are unsurprisingly pushing their way higher, but the weakness seen in gold prices has been rather muted. Right now it seems as if the market isn’t quite in balance and something will have to give – the precious metals could prove to be the weak point here.

The Traders’ View

Our prop desk continues to sit largely on the sidelines in what remains a difficult market to trade. We are however seeing some buying of long Euro positions against both the US dollar and the Yen. Attempts to pick off the top of the equity rally continue to prove costly.

Fundamentals – Fed rate hike looks imminent

Hawkish comments by voting FOMC member and typically dovish Lael Brainard yesterday helped drive further gains for the dollar as a March rate hike from the US now looks increasingly likely. There may have been some shortfalls in the data yesterday, including a slight undershoot in Fed’s preferred measure of inflation, but prints like manufacturing PMI came in well ahead of expectations and given the grandstanding we’re seeing from Donald Trump over how much tax reform will deliver back to companies and consumers, the challenge is going to be on to ensure the inevitable inflationary pressures this move should produce don’t end up damaging the economy. Economic data out of the US for the day ahead is relatively quiet so this may allow some degree of reversion to take place on those crosses where we’ve seen the most exaggerated moves.

A significantly narrower than expected trade surplus was posted from Australia overnight, adding fresh downside pressure to the Aussie dollar. However the move was attributed to bad weather as opposed to any structural shift, which has helped draw a line under the sell-off. More good news came in the shape of rising demand for imported consumer goods, suggesting renewed confidence in the domestic economy and supporting the idea that recession really is now off the table. Australia may be on course to post its first current account surplus in over 40 years and although this doesn’t present a short term trading opportunity, there should be a degree of support in the longer term being baked in here.

Sterling has taken a battering in recent days. UK Manufacturing PMI disappointed yesterday, whilst the prospect of higher rates in the US is also luring cash away from the UK, but to add to the economic drivers we also have the first signs of a political break down when it comes to the Brexit negotiations. The House of Lords backed an amendment to guarantee the rights of EU nationals already living in the UK, which if adopted has the potential to weaken the bargaining powers once Article 50 – the process of leaving the EU - is triggered. Given the beaten down state of the pound, this morning’s Construction PMI print at 9.30am GMT could well elicit a snap back on crosses like GBP/USD, even if we manage just to meet expectations.

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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