Markets calm following Wednesday night’s volatility

Today's news headlines:

'UK shop prices rise at fastest pace in nearly six years - BRC’. December’s increase represented only the fourth month of inflation in shop prices in five years. (Reuters)
‘Banca Carige worries trigger worst sell-off in Italian debt in three months’. Concerns are raised over the impact of the ECB concluding its asset purchase scheme. (Reuters)
‘Bank of Japan set to trim inflation outlook for next 2 years’. Falling prices including cheaper oil likely to drive revision lower. (Nikkei)

Currency markets were rather more restrained during last night’s session, and a general theme of reversion has been evidenced in recent hours, especially in USD/JPY. The pair spiked sharply lower off the back of Wednesday evening’s flash crash following bleak sales news from Apple, with the move being exaggerated by thinner than usual trading conditions. However, with optimism building that the US and China can strike a deal on trade, risk appetite is reportedly increasing, and this, in turn, is suppressing Dollar demand.

Sterling was also caught up in the week’s earlier volatility, with investors remaining skittish over the currency’s prospects given ongoing Brexit uncertainty. However, despite the lack of any further clarity, the Pound has been grinding its way higher against both the Euro and US Dollar in recent trade. News overnight from the British Retail Consortium (BRC) that UK shop prices are rising is playing to the idea that the Bank of England (BoE) won’t be able to hold fire on its interest rate policy for that much longer.

There’s a flurry of economic readings due from the Eurozone this morning including the latest Services Purchasing Managers’ Indexes (PMI) from France, Germany, and Italy, as well as German unemployment and Eurozone-wide inflation readings. Some of the PMI readings have the potential to come in below the break-even 50.0 mark, which has the potential to add fresh doubts to the European Central Bank’s (ECB) decision to conclude its asset purchase scheme. Critically, the Eurozone’s economic powerhouse, Germany, is expected to see its Services PMI hold steady at 52.5, while the nation’s Unemployment Rate figure is tipped to stagnate at 5.0%. Financial sector woes may be front of mind in the Eurozone right now, but assuming there are no surprises in the German data, this may prove sufficient to allow the common currency to hold steady in the near-term.

Being the first Friday of the month, US Non-Farm Payrolls will also be up for release at 1.30pm GMT. Given the significant overshoot in yesterday’s ADP Payroll print, expectations will be running high, while the Average Hourly Earnings figure can also expect to be under scrutiny, too. There have been some concerns that the Federal Reserve is maintaining too hawkish a line when it comes to monetary policy, but upbeat readings today could have the potential to deflect some of that criticism, and in turn, could lend further support to the US Dollar.

GBP/USD

The Pound has added around a cent against the Dollar in the last 24 hours, having now more than recovered all of Wednesday night’s sell-off. However, Brexit uncertainty will continue to hold back the currency, and with UK politicians returning to work on Monday, further price action may follow.

EUR/USD

The common currency is looking resilient against the Dollar, shaking off any specific concerns over the risk of a manufacturing recession in Italy and the health of the country’s banks, at least for now. Improving global risk sentiment is supporting the Euro against the US Dollar, but today’s flurry of data could serve to knock confidence once again.

GBP/EUR

The Pound is now close to its pre-flash crash level against the Euro, but the absence of signals over Brexit is arguably helping lend support here. There’s still no clarity over how the pivotal Brexit vote in less than two weeks will play out, so as this event approaches, there’s likely to be no shortage of investors looking to steer clear of Sterling exposure.