Sterling slips as dollar bounces after inflation sell-off: Image: Adobe stock

Sterling slips as dollar bounces after inflation sell-off.

A brief update on the trade markets by Mercury Foreign Exchange Limited.


Sterling slips as dollar bounces after inflation sell-off: Image: Adobe stock

British Pound

Reuters: The pound slipped on Friday as the U.S. dollar found a footing after falling sharply on Thursday in the wake of December’s U.S. inflation reading. Sterling was down 0.3% against the dollar at 1300 GMT at $1.217, after rising as much as 0.2% earlier in the European session. The pound was giving back some of its gains after rising 0.5% on Thursday. The euro pared earlier steeper losses and was last down 0.09% against pound at 88.75 pence. Data released on Thursday showed that headline U.S. consumer price index (CPI) inflation cooled for the sixth month running in December, spurring hopes that the Federal Reserve will be less aggressive in hiking interest rates. Separate data on Friday showed Britain’s gross domestic product rose 0.1% in November, below October’s 0.5% increase but above expectations of a 0.2% fall.

The dollar index, which tracks the currency against major peers, dropped almost 0.9% on Thursday. It started Friday on the back foot but found some strength at around 10:30 GMT and was last up 0.27% to 102.45. Chris Turner, head of markets at Dutch bank ING, said there was no obvious catalyst for the moves in currency markets. He said lower than normal trading volumes could be causing some volatility. “Liquidity is still a little bit light at the start of the year, so (it) may be just some flows going through,” Turner said. The pound tumbled 10.6% in 2022 as the dollar surged on the back of aggressive interest rate hikes from the Fed, which rocked global markets and lured investors back towards U.S. assets.

However, the pound has risen sharply against the dollar since hitting a record low of $1.0327 in September. As of Friday, it was on track for its fourth consecutive monthly increase. Yet sterling seems less strong when looked at against the euro. It had fallen more than 0.2% in January as of Friday, after a drop of 2.5% in December. Analysts have said this weakness reflects the bleak outlook for the UK economy. Parisha Saimbi, FX strategist at French bank BNP Paribas, said she expects the euro/sterling rate to rise above 90 pence in the coming months. “Trading above that 89/90 type level is generally reflective of greater economic stress or downbeat sentiment in the UK,” she said.

US Dollar

Reuters: The dollar tumbled to a nearly nine-month low against the euro on Friday after data showed U.S. inflation was easing, prompting bets that the Federal Reserve will be less aggressive with rate hikes going forward. The move lower in the dollar came as the Japanese yen surged, hitting a more than six-month high against the greenback, on a report that the Bank of Japan may take further steps to address the side effects of monetary easing. U.S. data showed the consumer price index (CPI) dipped 0.1% last month, marking the first decline in the data since May 2020, when the economy was reeling from the first wave of COVID-19 infections. Price pressures are subsiding as the U.S. central bank’s fastest monetary policy tightening cycle since the 1980s dampens demand, and bottlenecks in the supply chains ease.

“Three months of relatively lighter core inflation figures are starting to form a trend … one that could spur the Fed to slow the pace of tightening further on February 1,” said Sal Guatieri, senior economist at BMO Capital Markets.Fed policymakers expressed relief that price pressures were easing, paving the way for a possible slowdown in interest rate hikes, but they signaled the central bank’s target rate was still likely to rise above 5% and stay there for some time despite market bets to the contrary. Following the CPI report, the dollar plunged as much as 1% against the euro, its weakest versus the common currency since April 21. The euro has been supported by hawkish messaging from European Central Bank officials, with four on Wednesday calling for additional rate increases.

“Our expectations are for another 125 basis points of rate hikes from the ECB and stay there until 2024,” said Chris Turner, global head of markets at ING in London. “Our core views for Fed policy versus ECB policy would be for a stronger euro-dollar through the year.” The dollar was down 0.83% versus the euro at $1.0845 at 3 p.m. EST (2000 GMT) and down 0.56% against the pound at $1.22195. The U.S. dollar index was down 0.815% at 102.20, its lowest level since June 6. The greenback slumped as much as 2.7% against the yen, hitting a 6-1/2-month low against the Japanese currency. The yen was boosted by a Yomiuri report that the Bank of Japan (BOJ) will review the side effects of its monetary easing at next week’s policy meeting and may take additional steps to correct distortions in the yield curve. The news follows the BOJ’s surprise tweak in December to its bond yield curve control (YCC), though the move has failed to address distortions caused in the bond market by the central bank’s massive bond buying.

“With reports that the BOJ will review its lax monetary policy settings at its upcoming meeting, speculation has grown that another YCC shift will occur this quarter,” said Mazen Issa, senior FX strategist at TD Securities. That will likely happen at the BOJ’s January meeting, and if not then, by March, he said. “We expect 122 this quarter and likely in short order,” he said of the dollar-yen currency pair. The dollar was last down 2.41% versus the yen at 129.35 yen per dollar. The Aussie rose 0.92% to $0.69695, while the kiwi was up 0.52% at $0.63995. China’s offshore yuan was at its strongest level in five months, at 6.7331 per dollar, on optimism that China’s economy is on the road to recovery. Meanwhile, bitcoin rose for the fifth consecutive day, hitting its highest in a month at $18,863.

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South African Rand

Reuters: South Africa’s rand retreated on Friday, losing gains made after U.S. data offered hope inflation was now on a sustained downward trend, potentially allowing the Federal Reserve to slow its policy tightening pace. At 15:25 GMT, the rand traded at 16.8300 against the dollar, 0.6% weaker than its previous close. The dollar index, which measures the currency against six rivals, was last up 0.05% at 102.23, aided by fading risk appetite and mixed U.S. company earnings.

Locally, investors are grappling with the prospect of prolonged periods without electricity for South Africans as the country is currently struggling with recurring power cuts of about six to eight hours a day for most households. The country’s energy regulator on Thursday approved an 18.65% power price rise for beleaguered state utility Eskom for the financial year starting on April 1. “Looking forward, SA (South Africa) will see upwards pressure coming from the larger than expected 18.65% increase in electricity prices announced late yesterday by NERSA,” Investec analyst Annabel Bishop said in a research note.

Shares on the Johannesburg Stock Exchange ended higher, mirroring similar moves in global equities as hopes of inflation easing took hold. Overall, the broader all-share index ended 0.9% higher, while the top-40 index closed up 0.98%. The government’s benchmark 2030 bond was stronger, with the yield down 6 basis points to 9.765%.

ALSO READ: Dollar wobbles after US inflation data, yen on the rise

Global Markets

Reuters: Asian shares firmed on Monday as optimism about China’s reopening offset concerns the Bank of Japan (BOJ) might temper its super-sized stimulus policy at a pivotal meeting this week, while a holiday in U.S. markets made for thin trading. The yen climbed to its highest since May after rumours swirled the BOJ might hold an emergency meeting on Monday as it struggles to defend its new yield ceiling in the face of massive selling. That had local markets in an anxious mood, and Japan’s Nikkei slipped 1.3% to a two-week low. Yet MSCI’s broadest index of Asia-Pacific shares outside Japan still added 0.9%, with hopes for a speedy Chinese reopening giving it a gain of 4.2% last week. Chinese blue chips extended their rally with a rise of 2.0%, while the yuan reached its highest since July.

EUROSTOXX 50 futures added 0.6%, while FTSE futures put on 0.1%. S&P 500 futures and Nasdaq futures edged up 0.1%, after a Wall Street bounce last week. Earnings season gathers steam this week with Goldman Sachs, Morgan Stanley and the first big tech name, Netflix, among those reporting. World leaders, policy makers and top corporate chiefs will be attending the World Economic Forum in Davos, and there are a host of central bankers speaking, including no fewer than nine members of the U.S. Federal Reserve. The BOJ’s official two-day meeting ends Wednesday and speculation is rife it will make changes to its yield curve control (YCC) policy given the market has pushed 10-year yields above its new ceiling of 0.5%. The BOJ bought almost 5 trillion yen ($39.12 billion) of bonds on Friday in its largest daily operation on record, yet yields still ended the session up at 0.51%.

Early Monday, the bank offered to buy another 1.3 trillion yen of JGBs, but the yield stuck at 0.51%. “There is still some possibility that market pressure will force the BOJ to further adjust or exit the YCC,” JPMorgan analysts said in a note. “We can’t ignore this possibility, but at this stage we do not consider it a main scenario.” “Although domestic demand has started to recover and inflation continues to rise, the economy is not heating up to the extent that a sharp rise in interest rates and potential risk of large yen appreciation can be tolerated,” they added. “Thus, we think the economic environment does not strongly support consecutive policy changes.” The BOJ’s uber-easy policy has acted as a sort of anchor for yields globally, while dragging down on the yen. Were it to abandon the policy, it would put upward pressure on yields across developed markets and most likely see the yen surge.

The dollar is already at its lowest since May at 127.22 yen , having shed 3.2% last week, and threatens to break major support around 126.37. The euro also lost 1.5% on the yen last week, but was aided by gains on a broadly softer dollar, which saw it reach a fresh nine-month peak of $1.0872 on Monday. All of which saw the U.S. dollar index ease to its lowest since June at 101.780. The dollar has been undermined by falling U.S. bond yields as market wagers the Federal Reserve can be less aggressive in raising rates given inflation has clearly turned the corner. Futures now imply almost no chance the Fed will raise rates by half a point in February, with a quarter-point move seen as a 94% probability. Yields on 10-year Treasuries are down at 3.51%, having fallen 6 basis points last week, close to its December trough, and major chart target of 3.402%. Alan Ruskin, global head of G10 FX Strategy at Deutsche Securities, said the loosening of global supply bottlenecks in recent months was proving to be a disinflationary shock, which increases the chance of a soft landing for the U.S. economy.

“The lower inflation itself encourages a soft landing through real wage gains, by allowing the Fed to more readily pause and encouraging a better-behaved bond market, with favourable spill overs to financial conditions,” Ruskin said. “A soft landing also reduces the tail risk of much higher U.S. rates, and this reduced risk premia helps global risk appetite,” Ruskin added. The drop in yields and the dollar has benefited gold, which jumped 2.9% last week and was trading at the highest since April at $1,927 an ounce. Oil prices also rallied last week on hopes the speedy reopening of China would boost demand. Data on mobility, traffic and transport trips in China have shown a sharp revival in movement ahead of the Lunar New Year holidays next week. Chinese data on economic growth, retail sales and industrial output due this week are certain to be dismal, but markets will likely look past that to a rapid recovery now coronavirus restrictions have been dropped. Prices eased back a touch on Monday, with Brent off 45 cents at $84.83 a barrel, while U.S. crude fell 38 cents to $79.48.

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Written by The Mercury Team

This article originally published by mercury.global