02 January 2020: Sterling still “not out of the woods”

02 January 2020: Sterling still “not out of the woods”

Sterling still “not out of the woods”

02nd January: Highlights

  • Sterling to mark time until Brexit trade talks start
  • Dollar index has smallest range ever in 2019
  • Further slowdown to presage recession?

Will Johnson be prepared to negotiate?

The pound faces a period of uncertainty and potential volatility as the UK prepares for its formal departure from the EU in what Prime Minister Boris Johnson calls his “oven ready” Withdrawal Agreement.

Q1 2020 is likely to be driven by business coming to terms with the new rules and regulations Governing dealings with its existing suppliers and customers, while the Government prepares for negotiation of a trade deal.

EU Commission President Ursula von der Leyen has already commented that she is concerned about the timetable set by Johnson for a deal to be finalized over trade and it will take a degree of goodwill on both sides for the talks not to descend into acrimony.

It is clear to Brussels that Johnson has the “nuclear” option of leaving with no trade deal in place but given the advances that have been made of the Withdrawal Agreement, Brussels “dragging its heels” when faced with such a threat appears counterproductive.

The first trading day of the new year has been something of a damp squib so far, with Sterling retreating to a low just above 1.32 as the dollar’s correction finds a temporary base.

Manufacturing PMI will be released later this morning with analysts predicting a marginal improvement from 47.4 to 47.6

Considering your next transfer? Log in to compare live quotes today.

No reason to buy while trade optimism prevails

Despite starting the new year on a positive note, if trade positivity and risk appetite remain, the dollar will be under mild pressure. The dollar index has so far risen to 96.63 this morning but it will face sell orders on an approach to 96.80.

With the market having to wait until the end of next week for the December employment report, it will be risk appetite and possibly President Trump’s impeachment trial that will dominate short term.

Trump himself has played down the trial as a “witch-hunt” and while he is unlikely to be found guilty there have been a few rumblings from more centrist Senators who will use their votes to guarantee concessions from Trump in the runup to the 2020 election.

Since it takes a ⅔ vote to oust a President, it would take a remarkable rebellion by his own Party to see him removed from office.

As details of phase one of the trade agreement between Washington and Beijing remain sketchy, the market has typically moved to await phase two. If talks are scheduled and both sides remain positive about an outcome, traders will be willing to increase their risk appetite which means the dollar’s recent correction will continue. Since risk appetite is a “non-U.S.” matter overall, the fall is unlikely to turn into a trend although the longer it goes on the better for U.S. exports.

With inflation a little over the Fed’s target of 2%, the Central Bank will be keen to monitor the inflationary effect of a weaker dollar although any thoughts of a rate hike is far from Jerome Powell’s mind.

Prevarication mars decisive action on slowdown

At the risk of sounding like a broken record, the Eurozone economy is suffering. That suffering is at the hands of an overly bureaucratic system of oversight that has left the Central Bank dangling with no meaningful way of injecting any form of stimulus into activity.

Later this morning activity data will be released for Germany as well as the entire region.

Again, the monophonic tone continues with the economy expected to be “bumping along the bottom”. Germany continues to suffer although there is a growing degree of investor confidence born out of the renewed positive attitude to global trade. Activity, however, remains mired, it is expected to be unchanged in December at 43.4 while a similar story prevails for the region, again unchanged at 45.9.

In a similar way to the effect positivity over trade talks has seen the dollar correct, some form of discussion over the fate of the Eurozone needs to be seen to be happening for the market to become less negative. However, the entire Eurozone system is based upon a confusingly bureaucratic model with overall responsibility and power shared between at least three people. While it may work as a theoretical model, in the “real world” it slows the entire process down to such an extent, that urgent action is impossible to achieve.

The euro has started the year in the same vein as other major currencies. It has fallen back versus the dollar to a low of 1.1200, with 1.1160 the first significant level of support.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”