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Volatility Returns and Super Thursday

9 February 2018Equities
Volatility Returns and Super Thursday - Citibank UK

The equity market sell off that began on Friday (2nd Feb) after the US employment report (Non-Farm Payrolls) showed higher than expected wage growth. The average hourly earnings are closely watched by investors for potential inflationary pressures which would lead to tightening by the US Federal Reserve. The "good news" led to a pullback in equities that began a global selloff that on Tuesday led to the VIX reaching over 50. The return on volatility has seen a tightening in US yields, and safe haven flows benefiting the USD from its recent weakness. Citi Analysts are in line with the Fed's "Dot Plots", forecasting that they will hike rates three times in 2018, raising the target Federal Funds Rate by 75bps.

Citi Analysts haven't changed their structural outlook on the USD, and the latest appreciation against the USD and EUR, sees the currencies weaken from the January FX forecasts.

As volatility returns to the FX majors after a period of subdued trading, the opportunities for currency appreciation, and yield differential can provide diversification.

"Super Thursday" – Bank of England
The Bank of England "Super Thursday" where the central bank presents their Inflation Report, Interest Rate Announcement and meeting minutes. As expected the Monetary Policy Committee left interest rates and quantitative easing unchanged (voting 9-0). However, they highlighted stronger economic growth and that they may need to raise interest rates at a faster pace than originally expected at their November meeting. The initial reaction to GBP/USD was to trade higher (+0.77%) at 1.3990* with an widening in UK Treasuries, as the market expectations of interest rate increases adjusts.

Citi Analysts currently forecast near-term (-3 months) 1.4000 for GBP/USD and 1.4200 in 6-12 months. At the current prices Sterling is below our outlook, and could provide opportunities for GBP buyers; though this depends on individual circumstances. If the Brexit outlook was to shift to a "Hard Brexit" due to a breakdown in negotiations or a change in the Conservative key positions, in the near term this would like be GBP negative.

(The next Citi Analyst FX forecasts will be released on the 16th January)
*Reuters 12:15 8/2/2018

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