Dollar Resumes Bid – All Eyes on BOE

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Market Drivers February 8, 2018
Dollar stronger across the board
Will BoE remain dovish?
Nikkei 1.13% Dax -0.89%
Oil $61/bbl
Gold $1320/oz.
Bitcoin $8100

Europe and Asia:
No Data

North America:
GBP BOE Rate Decision 7:00

Back to dollar strength in the currency market today as both euro and cable reversed their Asia session gains at the start of London Trade. The dollar correction from deeply oversold levels continues irrespective of any fundamental triggers and yesterday’s budget deal in Senate provided a further boost to dollar bulls as it was the first sign of tranquility out of Washington DC in more than a year.

As both markets and politicians calm down, the greenback should continue to inch higher with USDJPY looking to run the 110.00 figure as the day proceeds. There is no major data on the docket, so flows will likely be governed by equity and fixed income markets.

Meanwhile, in New Zealand yesterday and series of conflicting messages out policy makers sent kiwi tumbling below the .7200 figure. The RBNZ kept it rate unchanged and lowered its Q1 growth by 0.4% but noted that growth would increase later quarters due to the shift in fiscal policy allocations by the new government. Overall acting Governor Spencer remained nonplussed about the recent strength of NZDUSD and stated that he expected both inflation and rates to trend higher. The kiwi which initially sold off on the downgrades in forecast, stabilized and rebounded post presser. But Mr. Spencer’s comments were completely overturned by a decidedly more dovish rhetoric from Deputy Governor McDermott who stated that he expected a policy change from RBNZ if the Trade Weighted index of kiwi strengthened and in any case expected kiwi to fall as Fed raised rates. The much more dovish slant weighed on the unit and pushed it lower during Asian session trade.

In North America, the focus will be on the BOE rate decision and inflation report due out at 1200 GMT. The Bank of England is expected to remain pat, but traders will be seeking clues as to the likelihood of ar rate hike in May. If the BOE votes uniformly 9-0 to keep rates steady, cable is likely to fall towards the 1.3800 figure as it will show that there is little urgency on MPC to tighten policy now. UK economy has been sending mixed signals with average wage gains finally getting some traction as they moved from 1.8% to 2.4% annual rate, but the latest PMI data showing a noticeable slowdown in activity across all three sectors with construction, in particular, teetering on edge of contraction.

Against this background, the BoE will also have to deal with ongoing uncertainty over the Brexit negotiations which are due to have some provisional agreement in March. Although the central bank will steer clear of politics, the BoE may hedge its bets on the policy until some clarity on Brexit deal is provided. Otherwise, the central bank risks shocking the UK financial system with a rate hike amidst the prospect of a hard Brexit.

For all those reasons, we think the BOE will be exceedingly cautious in its language and will maintain a decidedly neutral tone for the time being.

Boris Schlossberg
Managing Director

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