Powell Put is Back

The dollar erases gains from strong payrolls report as Fed Chair Powell indicates policy is "flexible".

Previous Day's Market Highlights

The dollar traded broadly weaker on Friday after dovish sounding comments from Fed Chair Powell halted the rally seen after a positive payrolls report. Data showed that the US economy added 312k new jobs in December while wages increased at an above-forecast 3.2% on a year-over-year basis. Despite a slight increase in the unemployment rate, the report was positive on the whole which sparked a modest dollar rally. This strength was short lived however, as comments from Fed Chair Powell later indicated that the Fed would be patient and flexible with policy and that the pace of tightening could be slowed.
 
While this was bad news for the greenback, which lost 0.5% against its peers, equity markets reacted positively to the prospect of less monetary policy tightening. All major indices in Europe and the US ended the day in positive territory, with both the Dow and S&P 500 gaining well over 3%. Markets viewed this as the return of the ‘Powell Put’ – the ability for the Fed to adjust monetary policy in a way that is favourable to the stock market by lowering interest rates to boost the economy.

Other data released Friday included Services PMI figures from the UK, which although released modestly above forecast and showing continuing expansion, flagged concerns over Brexit as well as indicating business confidence at its second-lowest level since 2009. Predictably, the pound was little changed by the release with market participants waiting for fresh Brexit-related news.
 
Finally, eurozone inflation ticked down to 1.6% on a year-over-year basis in December, casting some doubt on whether the ECB will conduct a rate increase this year while Canadian employment figures were released broadly in line with market expectations.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1152 1.1180 1.1004 1.57%
GBP/USD 1.2748 1.2800 1.2440 2.81%
EUR/USD 1.1431 1.1496 1.1269 1.88%
GBP/AUD 1.7868 1.8190 1.7291 4.94%
GBP/NZD 1.8888 1.9025 1.8117 4.77%
GBP/CAD 1.7021 1.7392 1.6700 3.98%

Today's Market Highlights

The first full week of 2019 begins with a much quieter economic calendar, with Monday’s main highlight being the US ISM non-manufacturing PMI figures released this afternoon. After figures for the manufacturing sector missed forecasts by a vast margin last week, sparking a decline in the dollar and increase in fears over a global growth slowdown, investors will be looking for today’s release to prove resilient and show strong expansion in the services sector.
 
Other data scheduled for Monday is of lower significance including retail sales figures for the eurozone as well as PMI figures from Canada, expected to show continued economic expansion in December.
 
With the House of Commons returning this week, and the Brexit debate re-starting on Wednesday, the direction of the pound is likely to be once-again determined by Brexit-related headlines in anticipation of next week’s meaningful vote on the withdrawal agreement. Despite this, monthly GDP data is set to be published on Friday, with monthly growth likely to be around 0.1%.

Elsewhere, the first central bank meeting of the year comes from the Bank of Canada on Wednesday. Odds of a rate hike have all but evaporated over the last few weeks with the weakness in domestic oil prices raising concern over the outlook for the Canadian economy. The direction of the loonie largely depends on the BoC’s tone, further downside pressure is likely if the BoC strike a more dovish tone than previously seen. Other important releases include minutes from December’s FOMC meeting, as well as US CPI inflation figures to end the week.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Retail Sales (m/m) 0.2% 0.3%
3:00pm CAD Ivey PMI 58.1 57.2
3:00pm USD ISM Non-Manufacturing PMI 59.7 60.7