Markets have had a lot to digest in the past 48 hours, including central bank policy meetings in the US and UK, key macro data in the US, UK, New Zealand and Australia and ongoing issue of Brexit.
The Dollar initially weakened sharply in the wake of yesterday’s Federal Reserve policy meeting, press conference and release of updated macro projections. All three arguably had a dovish tilt with FOMC members now expecting no policy rate hikes this year and only one 25bp hike in 2020. US yields dropped sharply and the market is now pricing in about 13bp of Fed rate cuts this year. However, the Dollar recovered today and is now broadly unchanged from its pre-Fed meeting level. A strong rebound in the Philadelphia Fed manufacturing index in March to +13.7 from -4.1 in February gave Dollar bulls something to cheer about.
Data out of Australia and New Zealand have been decent but not strong enough to sustain yesterday’s rally in the Australian and Kiwi Dollars. GDP growth in New Zealand was 0.6% qoq in Q4 which is a decent rate of growth compared to other developed economies, including the UK and Eurozone where GDP growth was only 0.2% qoq in the last quarter of 2018. Australia added an another 4,600 jobs in February and while this was below the consensus forecast of +14,800 it was the fifth consecutive month of positive employment growth.
The euro has experienced a similar pattern. EUR/USD, which has been on the ascendancy this month, surged above 1.14 yesterday for the first time since late-February but today was back down to 1.135.
Sterling, however, has been on a weaker footing. GBP/USD had hovered in a narrow 1.325-1.33 range but slipped below 1.32 yesterday and today plunged to 1.305 – its lowest level since 11 March. Markets have seemingly again in the past 48 hours grown nervous at the prospect of the UK leaving the EU without a deal in place on 29 March. Donald Tusk is of the view that the European Council should only grant the UK a 3-month extension (to 30 June) if the British parliament approves Prime Minister May’s draft Brexit deal next week and he is expected to formally confirm this position this evening. The fundamental issue is that it is still unclear whether the speaker of the House of Commons will allow a third meaningful vote, let alone whether the House of Commons will approve this deal in its third (and likely final) attempt. UK retail sales surprised on the upside in February, rising 0.4% mom following a revised 0.9% mom in January. The Monetary Policy Council meeting statement was little changed, with the MPC keeping alive the possibility of a rate hike in the event of an orderly Brexit. But markets have largely ignored these developments with their focus solely on the increasingly pressing matter of Brexit.
