Despite the escalation in the war of words between the US and Iran last week, Iran’s missile attack of two bases in Iraq which house foreign, including US, military personnel and Iran’s downing of a Ukrainian commercial jet carrying foreign nationals, volatility in major currencies remained relatively subdued.
The Australian and Kiwi Dollars, which are typically more sensitive to global risk appetite, were a little more volatile but the Dollar, Sterling and Swiss Franc remained range-bound in trade-weighted terms. The S&P 500 ended the week up about 1% and remarkably the price of Brent crude oil has fallen to $65/barrel – below the level which prevailed before the killing of Iranian general Qasem Soleimani ten days ago.
The Dollar has indeed traded in a range of less than 1% for the past three weeks, showing little reaction to the release of strong US macro data last week, including ISM non-manufacturing PMI and labour market figures. The Euro weakened 0.4% with markets seemingly increasingly less confident that the ECB will be able to reflate the Eurozone.
Sterling started the week strong, buoyed by upward revisions to UK PMI data for December, but gave back all of its gains in the second half of the week following dovish comments by Bank of England Governor Carney and Monetary Policy Council member Tenreyro. Both warned that the MPC may have to cut rates if UK economic growth did not show signs of rebounding. Their comments were echoed over the weekend by MPC members Vlieghe (in an interview with the FT) and Sterling has weakened 0.4% since Friday to a 3-week low.
MPC members Saunders and Haskel voted for a 25bp rate cut at both the November and December policy meetings and odds have risen that some of the other seven MPC members will join them in voting for a rate cut. Markets are currently pricing in 14bp of cuts by May, compared to just 10bp a week ago. Mark Carney’s last policy meeting in charge is on 30th January after which he will be replaced by Andrew Bailey, currently head of the FCA.
The Australian and Kiwi Dollars weakened respectively 0.8% and 0.4% last week, although the Australian Dollar did receive a boost on Friday from the release of strong Australian retail sales data (+0.9% mom in November, the joint fastest rate in almost two years).
