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Weekly Review Feb 27


Date of publication: February 28, 2017 | Author: Tim Clayton

Uncertainty was the dominant theme of the week with no clear signal on US interest rates and conflicting signals from the US Administration. Currency markets were subjected to choppy trading conditions with notable defensive demand for the Japanese currency and German bonds.

US

US economic data releases did not have a major impact during the week as jobless claims remained below the 250,000 level.

In the Federal Reserve minutes from the meeting at the end of January, many members expected that it could be appropriate to raise interest rates again fairly soon if the data continued to meet or exceed expectations.

There was still a high degree of uncertainty, especially surrounding fiscal policy and most members were still confident that inflation would not rise significantly.

The March interest rate decision was still open, although markets gradually drifted towards not expecting a move to hike rates next month and US bond yields edged lower.

US Treasury Secretary Mnuchin stated that there would be due process before labelling China a currency manipulator, but President Trump stated that China was the ‘grand champion’ of currency manipulators, maintaining concerns over splits within the Administration.

UK

UK GDP data for the fourth quarter of 2016 was revised up to 0.7% from 0.6%, but downward revisions to earlier data lowered annual growth to 2.0% from 2.2% and business investment data was weaker than expected.

In testimony to the Treasury Select Committee, Bank of England Governor Carney maintained a neutral stance and declined to give any forward guidance on policy.

Sterling made net headway against the week with some support on valuation grounds and potential defensive flows away from the Euro with EUR/GBP below 0.8470. The trade-weighted index rose 0.8% on the week, but GBP/USD failed to hold above 1.2500.

Euro-zone

There were strong readings for the Euro-zone PMI data for February with the composite index at the strongest level for five years amid evidence of rising inflation pressures.

The January CPI inflation rate was confirmed at 1.8% and the highest rate for over four years.

Political factors remained important with a continued focus on the French Presidential election. The withdrawal of centrist Bayrou was seen to have strengthened the position of Macron, but markets were still uneasy surrounding the risk that National Front leader Le Pen could gain further ground.

The main feature of the week was a further decline in German bond yields with the 2-year yield falling to fresh record lows near -1.0%. Lower yields suggested an increase in fears surrounding Euro-zone instability.

Overall, there were mixed influences on the Euro with EUR/USD settling near 1.0600.

International

Commodity currencies gained firm support during the week with a combination of a firm tone in global commodity prices and a slightly weaker US currency.

Gold and silver prices both strengthened to the highest level for over three months with support from a weaker dollar and lower bond yields.

Increased uncertainty was an important factor in supporting the Japanese yen as equity markets showed some signs of faltering with USD/JPY weakening to near 112.00.

 

 timTim Clayton is a market analyst with more than 20 years of experience in the financial markets, with particular focus on currencies. Holds an economics degree from University of New York. Writes for multiple publications including Investing.com and SeekingAlpha so he is on top of all the happening in the world of currencies and macro-economics. 

 

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