Sterling rallied yesterday, after Sajid Javid resigned his position as Chancellor of the Exchequer. The circumstances of Javid’s departure hinted at a desire by Number 10 to take direct control of fiscal policy, given that he reportedly resigned after Boris Johnson demanded he replace his team of advisors with appointments made by the the Prime Minister. A treasury official reportedly commented that Sajid Javid said “no self-respecting minister would accept” the terms he was offered to stay. The prospect of direct No 10 control of fiscal policy seems to have been taken by markets as an indication the Government is planning a deficit funded increase in spending. Such an increase would raise prospects for growth and inflation, and reduce the chances of a rate cut from the Bank of England. The rest of yesterday’s cabinet reshuffle proceeded without any major changes. Markets may be happy pricing in a Trumpian spending spree, but in truth the Government’s fiscal plans remain unknown, and yesterday’s events dramatically raise the stakes for the March budget, both for Johnson’s Government and UK financial markets.


The euro continued its downfall yesterday, reaching fresh lows against both the dollar and sterling as Sajid Javid resigned his position. Yesterday’s data included a sharp contraction in German monthly CPI, and updated economic forecasts from the European Commission, which remained unchanged for the eurozone as a whole at 1.2%. This morning German gross domestic product data showed a 0.0% change in Q4 2020, even worse than the modest  expansion that was expected by the median forecast submitted to Bloomberg. Given the highly discouraging hard data from German industrial figures last week, today’s GDP data perhaps is not as bad as it could have been. Investors will keep a close eye on eurozone GDP, employment and trade data, which will be released at 10:00 GMT.


The greenback saw another swathe of strength yesterday as a new methodology in spotting virus infections in China caused not only 14,480 more cases to be diagnosed, but also a risk-off rally as fears of a more entrenched outbreak rippled through markets. The broad dollar index is coming off of recent highs this morning, however, as today’s data from China of 4,823 new cases marks a significant reduction from yesterday. Despite the marked slowdown from yesterday’s peak under the new diagnostics, today’s data highlights that the rate of contagion is tracking twice that previously seen. Should the prevalence rate stabilise around this figure, markets will undoubtedly need to adjust. Risk rallies previously seen as the prevalence rate slowed may potentially be scaled back. On the data front, the CPI measure of US inflation rose from 2.3% to 2.5%. The US yield curve flattened due to the double whammy of higher than expected inflation and risk-off buying yesterday. 3-month yields jumped 0.3 basis points while the yield on the 10-year T-note fell 1.6bps. Today, further measures of the US economies performance in January are released in the form of retail sales data. Expectations sit at 0.3%, the same level December’s data printed at, while the core measure is expected to show a marked slowdown in auto purchases. In central banking, the New York Federal Reserve will cut tonight’s repo auction by $5bn to $25bn. This reduction in liquidity provision has occurred faster than analysts expected and highlights that the central bank is becoming more comfortable with liquidity conditions in the banking sector. The Fed signalled back in January’s meeting that support in the credit market will be withdrawn once banking reserves reach an “ample” level. This is projected to occur some point at the end of Q2.


Despite yesterday’s slide in risk appetite, which prompted the loonie to retrace Wednesday’s rally by 0.13%, the Canadian dollar is back on the offensive. Much of yesterday’s losses have been regained overnight in Asian trading hours as the US dollar softens at the margin. Joining the loonie at the front of the G10 pack is the Australian dollar, a similarly commodity-rich open economy in the developed market space. Today’s data calendar is light with just house price data released at 14:00 GMT. While the US data is likely to draw more attention with retail sales out at 13:30 GMT.



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