Markets rebound, but volatility remains elevated
- US equity markets bounced back overnight, with the Dow Jones closing up 567 points. But risk sentiment remains cautious, as seen by the elevated close in the Volatility Index (VIX) at 30.00 (though lower than the 50.30 high seen earlier this week). Markets are concerned about the possible emergence of inflationary pressures in advanced economies, which could potentially lead to tightening global monetary conditions.
EUR & GBP: Market volatility weighs on EUR sentiment, sterling the worst performer
- EUR sentiment remains subdued, despite a 4.3% pay rise for Germany’s labor union IG Metall over the next 27 months. But the European Central Bank’s Jens Weidmann tones down his usually hawkish comments, saying: “The greatest risk is not to assume that all problems are solved. Shocks in specific regions or specific sectors of the economy can still put the Euro area to an endurance test – despite the progress that has been made in the past years.”
- Recent disappointing UK Purchasing Managers’ Index (PMI) data and Brexit headlines have sent the sterling plummeting to new February lows at 1.3834. Reports suggest that the UK may be forced to accept nearly 37 EU directives during a two-year transition period after Brexit. This comes ahead of a key week for Brexit negotiations that will likely focus on governance withdrawal issues, Ireland and transition.
Commodity Bloc: RBA statement and poor data print weigh down on AUD, NZD higher on strong jobs report
- Australia’s weak data prints (December retail sales and trade balance) – together with a slightly dovish Reserve Bank of Australia (RBA) policy statement, which seems to hint that pricing in an early hike may be premature – could potentially weigh on AUD sentiment.
- Aussie rates currently discount around 17.5 basis points of RBA tightening in late 2018, which looks somewhat aggressive in light of the softer data prints and the stock market volatility this week.
- NZDUSD gains about 50pips this morning on strong Q4 employment data print – the unemployment rate fell below expectations at 4.5% (versus 4.7%) and average hourly earnings rose 0.8% (above 0.5% forecast). Markets await tomorrow’s Reserve Bank of New Zealand (RBNZ) meeting.
This is an extract from the Daily Currency Update, dated 7th February 2018. Please approach a Citigold Relationship Manager if you would like more information.