FX Super Day is Here

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Market Drivers March 15, 2017
Pound pops on news that Scottish referendum may not take place
UK Labor data mixed
Nikkei -0.16% Dax 0.24%
Oil $48/bbl
Gold $1202/oz.

Europe and Asia:
GBP UK Claimant Count 11K

North America:
USD Retail Sales 8:30
USD Core CPI 8:30
USD Fed Funds Rate 14:00
USD Fed Presser 14:30

The dollar remained on the back foot ahead of a crucial day in FX trading as traders awaited the FOMC meeting decision and press conference later in the day. The greenback as lower across the board but especially so against sterling which popped above the 1.2200 barrier in early London trade.

Cable verticalized nearly 100 points in a matter of minutes on news that Scottish First Minister Nicola Sturgeon would have a difficult time calling another independence referendum. The Financial Times reported that, “Nicola Sturgeon’s referendum plans were rapidly unravelling tonight as it emerged she is to abandon the SNP’s policy of rejoining the EU immediately amid record Euroscepticism in Scotland.”

Yesterday, Ms. Sturgeon made a strong appeal for another referendum vote in the wake of UK pulling out of EU, angering Whitehall, but despite the fact that Scotland voted to remain in EU the general will of the populace appears to resist the idea of going into the union alone away from the membership within the UK.

Cable reacted quickly as the news appeared to clear the final hurdle ahead of triggering Article 50 and formally giving notice to EU for UK’s exit. PM May indicated that the actual trigger should occur within weeks.

Meanwhile on the economic front, UK’s labor data printed mixed with claimant count improving to -11.3K from 3.2K eyed but wage growth coming in weaker at 2.2% versus 2.4% forecast. It’s still too early to say what the full impact of Brexit will be for the UK economy, but slowdown in growth momentum is clearly palpable as businesses begin to adjust to the idea of exit from the EU. Cable gave back some of its gain dropping below the 1.2200 figure in the aftermath of the news. We continue to believe that cable remains a sell the rally trade and will eventually test the 1.2000 barrier as the full impact of Brexit begins to hit the UK economy.

The focus today however, will be squarely on the FOMC meeting at 1800 GMT. Prior to the announcement the market will get a glimpse of US CPI and Retail Sales data which normally would carry a lot of weight, but today is likely to be ignored as traders await the news from the Fed.

At this point the notion of a rate hike is fully priced in and the buck could sell off on the any rate hike announcement unless it is followed by fresh revelation of steepening of the US rate curve. Dollar bulls will be looking for any clues that the Fed is considering four rather than three rate hikes this year and will Ms. Yellen’s words very carefully to see if she is open to the idea of more aggressive tightening.

For now USD/JPY has consistently failed to take out the 115.00 figure despite hawkish rhetoric from the Fed and robust US economic data. That suggests that the market remains skeptical about any aggressive moves from the Fed and has essentially priced in much of the tightening. Unless Fed Chair Yellen signals a more hawkish posture USDJPY could sell off on the news. In short unless USD/JPY takes out the 116.00 figure today providing a clear signal that a new uptrend is in place, the pair will continue to remain rangebound.

Boris Schlossberg
Managing Director

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