Forex today: Pound sinks on hard Brexit fears while dollar yields decouple ahead of Trump address

Fixed income found some support and corrected the sell-off late last week. The benchmark yield on the US 10-yr note fell modestly, back to 2.70%, while 2yr yields ended slightly lower, around 2.52%. As analysts at Westpac pointed out, "Futures markets continued to price little chance of any further Fed rate hikes in this cycle, with a 10% chance of a hike in December and a 10% chance of a cut."

As for data, the US ISM services sector PMI was lower due to the partial government shutdown and trade uncertainties. The composite index declined to 56.7 from 58 while the Markit’s final PMI for January was left unrevised at 54.2. 

The benchmarks were trading to their highest levels in two months ahead of President Donald Trump's State of the Union address.

Currency action

Analysts at Westpac offered a breakdown of the key movers in the g10's:

"Underperformer GBP fell from 1.3050 to 1.2926, commencing its decline on poor data. The UK Dec service PMI slipped to 50.1 (est. 51.0, prior 51.2), a 2 ½ year low, on the back of notably increased Brexit concerns. New orders contracted and employment fell. UK PM May delivered a Brexit speech in Northern Ireland in which she reiterated the government’s intention to reopen negotiations on the Irish border “backstop” but provided no new initiatives. The Republic of Ireland reiterated their strong stance of not reopening negotiations."

"The US dollar was mostly firmer despite lower US yields. EUR/USD fell from 1.1440 to 1.1410. USD/JPY ranged sideways between 109.30 and 110.00. Outperformer AUD/USD reversed around half of yesterday’s RBA-related gains, falling from 0.7265 to 0.7230 as the US dollar firmed. NZD ranged sideways between 0.6885 and 0.6905. AUD/NZD fell from 1.0530 to 1.0490, having been 1.0460 pre-RBA."

Key notes from the US session: 

• Wall Street closed with benchmarks at highest levels in several weeks

Key events ahead:

It is thin trade out there again with the Lunar New Year holiday. Also SGD, KRW, HKD, MYR, TWD. NZ is also out considering its Waitangi Day public holiday there - (The Global Dairy Trade auction takes place in the London session and it is worthnoting that Dairy prices have risen sharply in recent weeks)

However, a Speech by RBA Governor Lowe will be under scrutiny as investors will look further colour after yesterday's RBA event - RBA Governor Lowe speaks to the National Press Club around lunchtime. The title of his speech is "The Year Ahead".  (Does Lowe still think the next move in rates is likely to be higher?)

President Trump’s second State of the Union speech begins today 1pm Syd and analysts at Westpac explained what to expect:

"There is usually little for markets in any SOTU, with much of the content either boasting of past achievements or listing policy proposals that never become reality. On the latter, we may well hear another call for much-needed infrastructure spending, which President Obama also urged during SOTU addresses. Perhaps most relevant for markets is whether Trump has a plan for funding the border wall that doesn’t involve declaring a national emergency (media reports say he will not take that step). Government funding expires 15 February."