Daily FX Market Roundup Jan 25, 2019
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
After being shutdown for 35 days, President Trump announced on Friday that a deal has been reached to reopen the government for 3 weeks until February 15. During that time he expects both Democrats and Republicans to work together on a Homeland Security package that will include funding for border walls. The agreement will include back pay for furloughed workers, which is good news but the debate on the wall will resume in a few weeks and having gotten what they wanted with very little concessions, the Democrats won’t turn around and support border funding easily. Risk currencies rallied after Trump’s announcement but the US dollar pulled back as investors finally look forward to an onslaught of economic releases that should confirm the slowing economy.
Next week will be an important one for USD. The longest-ever US government shutdown delayed many economic reports and investors are left with nothing but small glimpses into how the economy is doing. That will change in the next few days with the Federal Reserve’s monetary policy statement and the Nonfarm payrolls report scheduled for release. Unlike other agencies, there will be no delays to NFP because the US Bureau of Labor Statistics is funded through September 30. The market’s appetite for US dollars is always a key driver of FX flows and we saw that last week when the greenback traded lower against all of the major currencies.
The latest US economic reports haven’t been terrible. Jobless claims fell below 200K for the first time in 49 years. The 4-week moving average also dropped to its lowest level since November. Although this state-based reading does include federal workers, it reflects a strong tight labor market. Larry Kudlow said that according to these figures, January payrolls could be up a significant amount. Now it will be difficult to exceed the more than 310K jobs created in December but anything in excess of 200K should be good for the dollar. As for the Federal Reserve’s monetary policy announcement, no changes are expected but Fed Chair Powell will hold a press conference after every meeting. Which means that even if policy remains unchanged, the market will get an updated assessment on the economy. Still, don’t expect the Fed’s view to change. Many economic reports have been delayed and the ones that have been released show the economy is weakening. Since December, consumer sentiment measures declined, inflation is lower and economic activity is slower. The labor market remains the primary source of strength but with hundreds of thousands of furloughed workers, the real numbers this month (federal + state) are probably much worse. We expect Powell to maintain a cautious tone that will hurt more than help USD/JPY.
Sterling is also in play with Parliament set to vote on Plan B and other alternatives proposed by lawmakers on Tuesday. Sterling hit 1.32 Friday on reports that the DUP could support her deal if it includes a “specifically time-limited backstop.” The DUPs fear that if she loses the vote and Parliament takes over Brexit negotiations, they’ll get an exit that could be far less desirable. Even so, the market is operating on the notion that a no-deal Brexit won’t happen and regardless of whether May wins or loses, the only reasonable outcomes at this stage are a soft Brexit or second referendum. According to Commons leader Andrea Leadsom, the EU is open to giving the UK a couple extra weeks past the March 29 deadline. There are 4 reasons why sterling is soaring in the face of Brexit uncertainty – 1) hope for a soft Brexit, 2) stronger UK data, 3) US dollar weakness and 4) short covering. GBP/USD fell 9% from its peak in 2018 and this year’s 3% recovery is only a fraction of that move. In the week ahead, depending on how the vote goes, Brexit will remain a key driver of sterling flows but US data will matter as the market digests Fed Chair Powell’s comments and the NFP report. This past week we learned that the UK labor market is doing very good with wages rising. On Friday, we will get a glimpse of how the manufacturing sector has been performing. Technically, there’s no doubt that GBP/USD is in an uptrend, but there’s a lot of resistance between 1.3175 and 1.3250.