Data starts to support EU and US central bank outlooks at last

Today's news headlines:

• ‘US Factory Orders show steep drop in October’. 12.0% nosedive in orders for transportation equipment plays to Federal Reserve’s dovish tone. (Morningstar)
• ‘German factory orders unexpectedly tick higher’. Q4 shows signs of promise for Europe’s largest economy. (Financial Times)
• ‘Weakening Dollar props up Pound as UK parliament vote eyed’. The situation could be far worse for Sterling. (Reuters)

Yesterday’s marginally better-than-expected German Factory Orders data may have thrown something of a lifeline to the European Central Bank (ECB), which remains on course to announce the termination of its bond-buying stimulus package next week. Recent data from the Eurozone hasn’t boosted confidence that the currency bloc will cope with tighter monetary policy all that well. Although this is just one number in isolation, it’s a move in the right direction that could help support the Euro in the near-term.

Similarly, a somewhat mixed bag of US economic data was reported yesterday too, again adding support to the idea that the Federal Reserve may be in a position to ease off the pace of rate hikes without presenting too much of a risk to inflation on the upside. The ADP Payroll survey came in showing new job creation around 10% lower than had been expected, while Durable Goods Orders for October slumped by -4.3%, well ahead of the forecast 2.1%. However, it wasn’t entirely negative news from across the Atlantic with the ISM Composite Purchasing Managers’ Index (PMI) print jumping. Economic headwinds may be building, but there’s still plenty of life in the US economy, for now.

9.30am GMT today sees the publication of inflation forecasts from the Bank of England (BoE) and TNS. These will be keenly followed as an upbeat print has the ability to heap pressure on Mark Carney and other policymakers to think about hiking UK rates again. A BoE rate hike hasn’t been seen since August, and the uncertainty for business surrounding Brexit means that a move in the next few months would be seen as rather unpopular. Suggestions inflation is creeping higher will add weight to the idea that the next upwards adjustment may need to be seen early in Q2 2019, which may lend support to Sterling.

The US Non-Farm Payrolls figure will be released at 1.30pm GMT and will be in focus along with the Average Hourly Earnings figure. Providing there’s no significant collapse in the job creation rate, the wage data has the potential to be more influential. An upbeat figure has the possibility to raise fresh questions over the Federal Reserve’s desire to ease back on the pace of interest rate hikes, which may see the US Dollar spike higher following yesterday’s sell-off for the DXY Dollar index.

The University of Michigan Consumer Sentiment reading is also up for publication at 3pm GMT. This is tipped to show a modest decline which could serve to support yesterday’s Dollar weakness. However, any break higher may once again call into question the ability for the Fed to ease off on rate hikes any time soon, with pairs such as GBP/USD feeling the downside pressure as a result.

GBP/USD

The Pound has been trending lower against the US Dollar in overnight trade, although optimism does seem to be emerging over the UK’s ability to at least avoid a hard Brexit. Sterling remains incredibly difficult to call, given the wide array of political options on the table, plus the implications they could hold for monetary policy.

EUR/USD

The Euro has been sitting in a relatively tight range against the Dollar all week, with the common currency failing to make much upside off those signs of weakness in the US economy. Expectations remain strong that the ECB will confirm the end of bond-buying next week, so further soft economic data from across the Atlantic could see the pair advance.

GBP/EUR

Ongoing political risk in the UK has left the Pound very much on the back foot. An upbeat Bank of England inflation forecast today may, therefore, provide some impetus to drive Sterling higher in the short term, although Brexit developments have the potential to deliver far more direction.