Growth data to kill off rate hopes

Sterling lower as headwinds build

The pound fell to a new one-month low yesterday as concerns grew that the Q1 GDP data which is due for release later this morning will be lower than the 0.4% analysts have been expecting.

Any optimism that had built over the previous month has now evaporated and the pound looks vulnerable to further falls. It made a new low of 1.3895 and closed below the 1.3920 support although it has rallied a little reaching 1.3935 overnight. Versus the euro, the pound continues to rally due primarily to the single currency’s current weakness. It reached a high of 1.1518 as the euro struggles to find any support.

Should today’s GDP data be at the lower end of expectations lingering hopes about a rate hike next month will probably be finally extinguished. Poor early spring weather is likely to have contributed to any downturn, but sentiment has turned against the pound and traders will be satisfied to act upon a poor headline.

The Government is clearly struggling to agree a final proposal for Brexit and could still try to remain part of the customs union and single market despite the Prime Minister’s statement that the UK will categorically leave following departure from the EU. That story still has plenty of twists and turns left until a final decision is made although it will take a major surprise to have any positive effect on the currency.

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Draghi remains true to form

Yesterday’s meeting of the General Council of the European Central Bank provided nothing in the way of surprises. Mario Draghi, the ECB President, in his regular press conference, commented that the ECB was pleased with the growth that is being seen across the region but confirmed his belief that there is no need for any change in either interest rates or the additional measures that have been in place for some time to support the weaker economies.

Despite there being little new in Draghi’s comments which were entirely predictable, traders took the opportunity to drive the single currency lower. It broke through what had previously been strong support at 1.2160 and reached a low of 1.2094. It has now reached dangerous territory and a break of 1.2080 will signal a test of the psychologically important 1.2000 level.

The recent turnaround in the fortunes of the dollar (see below) has been coincided with concerns about the sustainability of growth in the Eurozone as the ECB has very few weapons to counter any sustained downturn despite that not yet being the base case of many analysts.

The market is still of the opinion that he ECB will start to withdraw accommodation later in the year, but that view will need to be reinforced by stronger data although a fall close to long term support at 1.1820 may provide the rise in inflation that is needed to convince the ECB that rates need to be increased.

Dollar basking in positive glow.

The holy trinity of monetary policy, economic data and improving risk appetite have combined to drive the dollar close to its 2018 high.

The dollar index yesterday reached 91.64 and looks likely to end the week with a very positive outlook. The dollar may have started to rally almost by default as the euro and pound ran out of steam, but it now looks to be self-supporting as long-term yields look unlikely to halt their advance with 3.10% now a real possibility and a June hike in the Fed Funds rate now being actively discussed.

Next week’s employment report will be preceded on Monday by personal consumption data which is apparently the FOMC’s preferred measure of inflation. It is expected to have risen from 1.6% in February to 1.8% in March which will provide further encouragement to June hike expectations.

The FOMC meets next week but it is too soon to be considering a rate hike although Chairman Powell’s comments following the meeting will be monitored for more hawkish language.

Overall, the dollar looks to be heading for its strongest month of 2018 with little on the horizon to change the bullish outlook.