Inflation and the GBP in Focus as the USD Steadies From Monday’s Tumble

Earlier in the Day:

Economic data release through the Asian session this morning included 4^th quarter business confidence and December electronic card sales out of New Zealand, together with Japan’s December tertiary industry activity index numbers, which had little to no impact on the Yen.

For the Kiwi Dollar, it was a bad start to the session. 4^th quarter business confidence slumped by 12%, more than reversing the 5% uptick in the 3^rd quarter.

The Kiwi Dollar moved from $0.73060 to $0.73007 upon release of the data, with the moves relatively muted following the softer end of year declines in business confidence in the wake of the general election result.

Electronic card sales figures were not much better, rising by just 0.5% in December, down from an upwardly revised 1.3% increase in October.

The softer number was attributed to a 2.2% slide in apparel sales and 0.1% falls in both hospitality and vehicles (excl. fuel) sales. The sale of durables were unchanged, while fuel sales surged 4.0% off the back of rising fuel costs and consumables gained 0.7%.

While spending for the December-2017 quarter increased by 1.3, compared with a 0.5% rise in the September-2017 quarter, concerns over a bad end to the year weighed.

The Kiwi Dollar showed more of a reaction to the softer numbers, falling from $0.73007 to $0.72998 upon release of the data, with the Kiwi Dollar feeling the heat ahead of the Asian open. At the time of writing, the Kiwi Dollar had eased back further, down 0.23% to $0.7283.

Recent gains in the Kiwi Dollar have come more from increased optimism over the global economy and U.S Dollar weakness than from a shift in sentiment towards the New Zealand economy. This morning’s stats are a reminder of current sentiment in New Zealand, with both business and consumer confidence having waned through the final quarter, leaving consumer consumption and business investment as key concerns.

Elsewhere, the Aussie Dollar was down just 0.04% to $0.7962, while the Yen went into reverse, falling 0.35% to ¥110.93 against the Dollar, the decline coming over concerns that the BoJ may look to curb the Yen’s recent rally that comes off the back of a shift in sentiment towards BoJ monetary policy.

In the equity markets, the ASX200 slipped 0.47%, with miners and bank stocks weighing on the index. News of stockpiles of iron ore at Chinese ports saw iron ore futures slide, bringing down mining stocks, while a report released by Fitch Ratings weighed in Aussie Banks, with Fitch warning of a tough year ahead on expectations that bank NPLs will be on the rise.

In contrast, the rest of the majors made solid gains through the session. The Hang Seng led the way, rallying 1.13% at the time of writing, with Nikkei not far behind, up 0.98% ahead of the close, with the CSI300 gaining 0.56%.

The Day Ahead:

Economic data out of the Eurozone this morning is limited to finalized December inflation figures out of Germany and Italy, which are unlikely to have a material impact on the EUR, barring an unexpected deviation from prelim numbers.

It’s been a solid start to the year for the EUR and Estonia Central Bank head Hansson suggested that the ECB’s asset purchasing program could come to an end in September should economic and inflation forecasts be met, providing further support at the start of the week.

At the time of writing, the EUR flat at $1.2264, with politics and market risk appetite likely to be the key drivers through the day, as the markets begin to favour the EUR over the Dollar on policy divergence expectations.

Whether the ECB will allow the EUR to continue to appreciate remains to be seen however, with the Eurozone’s trade driven economic recovery having been heavily reliant upon a softer EUR.

Across The Channel, it’s a big day for the Pound, with economic data out of the UK including December’s inflation figures.

Following the BoE’s rate hike back in November, inflation has yet to ease off, which will certainly raise market sensitivity to today’s figures, though the good news for the BoE is the recent bounce in the Pound. With the Pound sitting just shy of $1.38 levels.

The markets are somewhat divided over whether the BoE will hike again this year, but if inflation does fail to fall back to the BoE’s 2% target, the time will likely come when households will bear the brunt of BoE monetary policy and need to tighten the purse strings.

The Pound was down 0.02% to $1.3789 at the time of writing, with today’s stats and Brexit the area of focus for the day. Things are likely to get choppy as Merkel frees herself from coalition talks and begins to focus on Brexit. With Merkel coming back off the ropes and Germany looking for greater control over its future, the Chancellor’s not going to be giving it away and Spain and Holland aren’t going to have too much influence.

Across the Pond, it’s a relatively quiet day on the data front, with key stats out of the U.S limited to January’s NY Empire State Manufacturing Index figures. While forecasts are for the Dollar to find some support off the back of the numbers, Dollar weakness is coming off the back of a shift in sentiment towards monetary policy and not a negative outlook towards the U.S economy.

There’s just nowhere for the Dollar to hide at present and until the ECB comes out to manage the recent rally that is likely testing trade terms, there’s little that the Dollar bulls can do about it.

At the time of writing, the Dollar Spot Index was up 0.03% to 90.508 and, with stats on the lighter side this week, the Dollar will be left in the hands of the EUR, the GBP and the Yen, with little to shift sentiment through the day