Daily Forex Commentary

12 January 2018 - EUR extends gains against GBP after ECB shock. USD steady at lower levels ahead of CPI figures today.

By Nick Parsons

Friday 12 January



British Pound (GBP)

The GBP had a classic day of two halves on Thursday; weak in the morning after the publication of the BoE Credit Conditions Survey (see below) but then rallying hard against the USD – but not the AUD, NZD or EUR - during the London afternoon. The pound hit a fresh 2018 low of 1.3461 just before the ECB lit a fire under the EUR but by the close of business in Europe it had gained more than three quarters of a cent to a high of 1.3547. Overnight in Asia it extended these gains to just below 1.3560. The Bank of England Quarterly Survey of Credit Conditions for Q4 2017 was perhaps more encouraging from a regulatory perspective than in terms of the economic outlook as it shows some behavioural changes on the part of both borrowers and lenders. Lenders reported that the availability of secured credit to households was unchanged in the three months to mid-December 2017 and expected no change over the next three months to mid-March 2018. The availability of unsecured credit to households was reported to have decreased again in Q4, such that reductions were reported in all four quarters of 2017. Lenders expected a significant decrease in Q1. Credit scoring criteria for granting total unsecured loan applications tightened again in Q4, and lenders expected them to tighten significantly further in Q1. On the demand side, lenders reported that household demand for secured lending for remortgaging increased significantly in Q4. At +49, the net percentage balance suggested the largest quarter-on-quarter change in demand for this type of lending since the falls reported in early 2009. While demand for credit card lending was reported to be broadly unchanged in Q4, demand for other unsecured lending was reported to have fallen significantly. This is the first material reported fall in demand for either component of unsecured lending since the fourth quarter of 2015. Good news, then, from a financial stability perspective, but maybe not so good in terms of driving the UK economy forward into 2018. There are no other economic statics this Friday and the pound opens in London this morning at USD1.3555, AUD1.7185 and NZD1.8700.



US Dollar (USD)

USD/GBP expected range: 1.3445 – 1.3540

The last 48 hours have been a pretty wild ride for the US Dollar. ‘Fake news’ from China had seen it fall sharply then erase all its losses before the ECB’s bombshell (see below) hit the foreign exchange market on Thursday and sent the USD tumbling once more. Having recovered from 91.60 to a high in London of 92.17, the US Dollar Index against a basket of major currencies fell sharply throughout the New York session to end the day back down at 91.50. Overnight in Asia it has been down to 91.44 before recovering back to last night’s close. As well as the ECB news, the USD was not helped by a very soft set of US PPI figures. The Labor Department said its producer price index for final demand slipped 0.1% last month. That was the first drop in the PPI since August 2016 and followed two straight monthly increases of 0.4%. In the 12 months through December, PPI rose 2.6% after accelerating to 3.1% in November. There isn’t a perfect – or even a very good – correlation between PPI and CPI on a monthly basis. Indeed, if there was, there’d be no need to publish CPI figures separately or for markets ever to worry about them: all the fresh information value would be in the PPI. We’ve said before that the FX market reaction is often to shoot first and ask questions later so it would have been a brave analyst who stood up in the middle of a busy dealing room to announce that the PPI figures didn’t matter. The market has passed its verdict that soft PPI means expectations for CPI today should be lowered. That’s probably a wrong assumption but we’ll see this afternoon. Consensus expectations are for a +0.2% m/m gain to leave the annual rate of CPI inflation at 2.1%. Separate but simultaneously released numbers on December retail sales are expected to show both the headline and core (ex-autos) measures rose 0.4% on the month. The US Dollar index opens in London at 91.48 whilst US 10-year bonds are back at 2.54% from 2.59% earlier in the week.



European Euro (EUR)

GBP/EUR expected range: 1.1220 – 1.1350

The euro was quietly trading in the USD1.1940’s in the European morning on Thursday, caught between the usual opposing forces of very strong economic data and worries about German politics. Then, at lunchtime, the ECB released its usually bland account of the last monetary policy meeting of the Governing Council. Buried deep in the report, the ECB dropped a bombshell on to financial markets. Bear with us here please as it’s a bit technical… The ECB said, “The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year. In particular, as progress was made towards a sustained adjustment in the path of inflation, the relative importance of the forward guidance on policy rates would increase... From this perspective, the Governing Council’s forward guidance framework would evolve naturally, in line with the established sequencing between the APP and interest rate guidance. It was suggested that the Governing Council’s communication should be adjusted gradually over time to avoid sudden and unwarranted movements in financial conditions.” In plain English, the ECB had previously stuck with a public view that there is no need to change forward guidance on interest rates for some considerable time and that a change in interest rates would not come until well after the end of QE (or the Asset Purchase Programme as it is formally known). Indeed, the interest rate market was still not fully pricing an ECB rate hike until early 2019. But, if it is now saying it will need to alter its guidance, then the FX and interest rate markets jumped to the logical conclusion that this is the precursor to a shift in ECB interest rate policy. Hence, the EUR jumped from 1.1940 to a high of 1.2050 and to joint top of the one-day leader board with the NZD. It will be interesting to see if they now follow through with the usual tactic of sending out “ECB sources” to try to push back against these new market expectations… For now, the EUR opens in Europe this morning at USD1.2060 and GBP/EUR1.1235.

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