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USD gains after policy makers upgrade their inflation outlook

Published: Wednesday 21 February 2018

  • Focus on UK wage growth as a measure of inflation
  • Eurozone Purchasing Managers’ Index falls short of expectations
‚ÄčBy Zafer Deniz 

The Dollar powered higher on the back of a restrained decline in US equities. The Dow Jones Industrial Average ended the day down 250 points but the decline in the S&P 500 was more modest. The important technical levels of 2,750 in the S&P 500 and 25,500 in the DoW continue to hold which means currencies and equities are still vulnerable to a deeper correction. No US economic reports were released yesterday but Purchasing Managers' Index reports, existing home sales and the FOMC minutes are scheduled for release today. These reports should help the dollar hold onto its gains as, at the last Federal Reserve meeting policy makers upgraded their inflation outlook and touted the improvements in the economy. 
Although the CBI trends survey came in weaker than expected yesterday, which is a sign of slower manufacturing activity, Sterling was supported by the UK government's hope that a Brexit deal will be done by the end of the year. For now, the focus will shift to today’s UK data as the unemployment data will determine how quickly the Bank of England raises interest rates. Speculators are banking on a move in May but if today’s labour data fails to live up to expectations, those odds, which currently sit at 76% could sink quickly.
According to the Purchasing Managers’ Indexes (PMI), January was a very strong month for job growth but everyone's focus will be on wage growth as it's a measure of inflation. Average weekly earnings growth has been hovering at its highest level in 2017 for the past two months. Investors view this difficult to maintain so if wage growth slows, we could see a more meaningful correction in GBPUSD. Bank of England Governor Mark Carney along with monetary policy committee members Broadbent, Haldane and Tenreyro will also be testifying on the Inflation Report before the Parliament's Treasury Committee so expect some market moving comments. The labour data will determine whether GBPUSD recaptures 1.40.
As for the Euro, if Eurozone PMI’s fall short of expectations the single currency could edge lower. After the recent weakness and volatility in the DAX, it was no surprise to see German investor confidence tumble in the month of February. Consumer confidence also took a hit according to the Eurozone's latest report. February PMI’s are scheduled for release today and slower growth is expected in the manufacturing and service sectors. How EURUSD responds will be dictated by the degree of weakness.

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Today's Major Economic Releases

Market BST Data/Event Previous Expected
EUR 09:00 EU: Flash Manufacturing Purchasing Managers' Index 59.6 59.2
EUR 09:00 EU: Flash Services Purchasing Managers' Index 58.0 57.7
GBP 09:30 UK: Average Earnings Index 2.5% 2.5%
GBP 09:30 UK: Claimant Count Change 8.6k 2.3k
GBP 09:30 UK: Public Sector Net Borrowing 1.0b -11.5b
GBP 09:30 UK: Unemployment Rate 4.3% 4.3%
GBP 14:15 UK: Inflation Report Hearings    
USD 19:00 Federal Open Market Committee Meetings Minutes     

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