Fed emphasises hawkishness as Chinese manufacturing falls to 7yr low


Federal Reserve to shift guidance but remains hawkish Chinese manufacturing falls to 7yr low in February
UK unemployment shifts higher despite decent drop in jobless claims French CPI slips by 0.6%, increasing pressure on euro

The refocusing of the Bank of England’s forward guidance plan last week to include real wages and inflation alongside jobs will allow it to lean on more data to substantiate its desire to keep rates lower for longer. We would hope to see lower inflation over the course of 2014 to allow for the gap between prices and wages to lessen. Yesterday’s unemployment numbers fleshed this out a little further.

Movements in the UK jobs market have been unexpected since the middle of last year, but yesterday morning’s increase to 7.2% from 7.1% was the first time we have seen a negative surprise since the beginning of 2013. For every action there must be a reaction and this is that – the overall news is good however with jobless claims 28,000 lower on the month. The trend is still one of an improving jobs market but the Bank of England will be keen to emphasise the likelihood of slowing improvements the closer we get to the long run average of 6.5%.

Productivity will increase as more people are put into work and therefore the need for fresh workers diminishes. We believe that yesterday’s inflation number – the lowest since November 2009 – alongside this jobs surprise should be enough to loosen some near term rate hike expectations and maintain that this fits with our timeline of rate hikes beginning in Q2 2015.

Yesterday we also received the latest round of the Bank of England’s minutes although there was little volatility from these.

USD is slightly stronger overnight following the minutes from the Federal Reserve meeting at the end of January. Once again the FOMC emphasised that tapering is very much data dependent but that the tone was on a swift end to purchases, reaffirming the desire to reduce QE by $10bn a meeting. There was also chatter around ‘qualitative guidance’ and how the Federal Reserve’s forward guidance should change to reflect that the US economy is close to the 6.5% unemployment threshold it has enforced. New indicators to take into account will be financial stability and inflation. The former of these is hawkish – there is little damage that a rate hike would do to the financial system although those in emerging markets would be considerably nonplussed – while the latter is a dovish hint. Inflation is well below target in the US and could see the ultra-accomodative rate policy extended further despite some chatter from some members about near-term rate rises. The latest US CPI reading is due this afternoon at 13.30.

Chinese manufacturing has fallen to the lowest level in 7 years overnight according to the preliminary reading of Chinese PMI. 48.3 is a lot lower than the 49.5 reading that had been expected by economists with any reading below 50.0 a sign of contraction. You’ll remember our surprise recently around the strong level of officially reported export growth and how it differed from anecdotal evidence from the manufacturing sector. Today’s number emphasises the differential. This poor number comes only days after the People’s Bank of China acted to reduce froth in the banking system by draining $7.9bn of liquidity; we do not forecast a credit crunch but softening growth and expansion alongside liquidity withdrawals is a tricky needle to thread.

AUD has been smacked as a result and finds itself below the 0.90 level against the USD for the first time in 6 days.

The euro is not enjoying the best start to the day either following another 2 poor inflation readouts from the core of the Eurozone. German PPI fell by 0.1% in January and is now 1.1% lower than this time last year while French CPI fell by 0.6% in January. These are the deflationary pressures that we have spoken about since November and will lead to rapid reevaluation of the ECB’s meeting next month. Preliminary PMIs later this morning from both France and Germany should also hurt the single currency.

Have a great day.

Indicative Rates



GBPEUR 1.2148 1.2171
GBPUSD 1.6641 1.6663
EURUSD 1.3691 1.3712
GBPJPY 169.36 169.61
GBPAUD 1.8549 1.8580
GBPNZD 2.0096 2.0121
GBPCAD 1.8431 1.8456
NZDUSD 0.8275 0.8292
GBPZAR 18.444 18.472
USDZAR 11.069 11.093
GBPPLN 5.0670 5.0910
EURJPY 139.29 139.42

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