Brutal fade in Fed expectations despite strong ADP print

Super Thursday to disclose risks

Ipek Ozkardeskaya

The Bank of England may offer some verdict on future monetary policy but also reveal the latest economic forecasts via the Quarterly Inflation Report today. The BoE is expected to stand pat, yet there is little doubt that the QIR will put the emphasis on the negative impact of falling oil and commodity prices on recovery, concerns about the global economic outlook led by the slowing Chinese growth, disinflationary fears, rising downside risks on inflation expectations and mounting Brexit risks. Cable rallied to 1.4649 in New York yesterday, mostly on the back of an aggressive USD sell-off.
Yesterday’s rise could rapidly be retraced depending on the how dovish the market construes the QIR.

The FTSE is 100 points higher in London. A bounce in commodity and oil prices has benefited Anglo American (+9.50%), Glencore (+8.09%) and BHP Billiton (+6.48%), although the situation in UK’s oil companies is far from encouraging.

After news that BP profits slumped 91% earlier this week, Shell announced 44% slide in its Q4 profits. Royal Dutch Shell gained past 5% however as BG acquisition and growth prospects should allow the company to avoid cutting on dividends.

Despite the build in inventories, WTI has gained 12% on an aggressive sell-off in USD. Some of this can be attributed to some comments from the FOMC’s Dudley who stated that further rate hikes in the face of the current climate may not materialise.

Brutal fade in Fed expectations despite strong ADP print

Little explanation was given to yesterday’s ruthless USD move, which damaged important technical levels. EURUSD and gold rallied past their 200-day moving averages.

In New York, the EURUSD surpassed the 200-day moving average in a single move yesterday. The pair surged to 1.1161 this morning, even after ECB President Draghi stepped in to ease the Euro-bulls. Draghi warned that monetary policy cannot be relaxed about series of supply shocks, adopting a wait-and-see attitude would carry risks. As we edge towards overbought conditions (RSI 65%) on the back of Draghi’s words, but in the main on the rush to the perceived safety of the (mostly) negatively yielding Eurozone bonds, the euro market could well be handed back to the bears should the upside momentum reach exhaustion point.

The ADP released a solid jobs report yesterday, which at least verified that the jobs data was not the reason behind the USD sell-off. The US economy added 205,000 private jobs in January. The ADP employment report was weaker than the previous month’s 257,000 additional jobs, yet fairly better-than the consensus, 193,000. Due on Friday, the NFP is expected to be around 190,000 in January; this is more than 100,000 less than December print, 292,000. A soft release may offset any possibility of a Fed hike in 2016, whereas a fourth straight month of positive surprise could improve the US economic outlook, bring the Fed hawks back in the game and revive the expectation that the Fed could at least carry on with a 25-50 basis point rise before the end of the year.