Germany, Italy and the USD

Weekly Report - 26/02/2018

The US Market Recovers


Last week to February 23rd, uncertainty over the white smoke of the new German coalition government and the upcoming Italian elections pulled down the common currency. U.S. markets ended in the green territory as the Federal Reserve’s meeting minutes revealed important clues for investors.

Last Week

The USD ended higher against almost all other majors, after the minutes of the US Fed latest policy meeting and the pace of the interest rate hikes boosted optimism over the strength of the country’s economy. In economic news, US manufacturing and services sector reported higher than market expectations. The labor market continued to strengthen as previous week’s initial jobless claims declined unexpectedly.

UK markets finished mixed for the week. The FTSE 100 index ended lower owing to losses in the financial and the mining sector stocks as corporate earnings were disappointing. Additionally, UK’s gross domestic product advanced at a weaker than expected rate for the last quarter of 2017, raising concerns over the nation’s economic outlook while Brexit negotiations over the trade deal find opposition rising.

The German DAX 30 climbed 0.3%, though the EUR ended lower against most other majors. Inflation of the 19 nations eased in January from December 2017 putting pressure to delay the timing of the next interest rate hike. Moreover, the region’s manufacturing and services PMI dropped more than expected and German Ifo business climate also dropped more than expected in February.

Gold prices had the worst week since early December as the dollar extended a recovery from three year lows since the Fed’s expectations were for more aggressive monetary policy. Oil prices finished their second consecutive weekly gain, after the Energy Information Administration stated that US crude oil stocks fell by 1.6 million barrels in the week ended 16 February 2018. OPEC-led production cuts also add to the positive outlook by growing optimism that rebalancing in crude markets are well underway.


Week Ahead

Global financial markets will focus on inflation related events this week as new Fed Chair Jerome Powell's testifies on Tuesday, February 27th before congressional committees. On Thursday, personal consumption expenditures, the Fed's preferred gauge for inflation, will be the highlight of the week.

Last week’s minutes from the Federal Open Market Committee's policy meeting drove speculation the U.S. central bank will raise interest rates at a faster pace than currently expected. The Friday report stated that the central bank sees the U.S. economy past full employment, although with only "moderate" wage gains. The next interest rate hike is anticipated on the next FOMC policy meeting on March 20-21 and is priced in at 80%.

On Wednesday, the second estimate of GDP growth for the Q4 in the U.S. is expected to show a small downward revision from 2.6% to 2.5%.

The Euro-zone will report the CPI figure on Wednesday. The reading is expected to be strong, and it could push the European Central Bank another step closer to ending its stimulus program.

Thursday is a manufacturing day with reports on ISM manufacturing sector growth with economic data coming in from China, Germany, the UK and the US.

This coming weekend two big political events could spur risk and uncertainty over the Euro-zone. Firstly, the Italian general election on March 4 could lead to a hung parliament. Secondly, on the same day the German Social Democrats' poll its members on joining another coalition government with Chancellor Angela Merkel's conservatives.

The oil market also recovers, with oil prices extending gains to hit their highest level in nearly three weeks, supported by comments from Saudi Arabia that it would continue to curb exports in line with the OPEC-led effort to cut global supplies.


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