Daily Market Brief 3 January 2018

Dollar weakness Boosts Sterling

January 3rd: Highlights

  • Pound and Euro start year at multi-month highs
  • Davis wants Financial Services included in Brexit deal
  • Data to give early indication of direction

Eurozone economy starting to grow significantly

Data released yesterday for manufacturing activity in the Eurozone was at its strongest in twenty years. This was the first evidence necessary for the ECB to consider the removal of additional stimulus to the economy this year and allow rates to rise. Two members of the ECB made bullish comments on the continued need for the Asset Purchase Scheme which led the single currency higher.

Ewald Nowotny, The President of the Austrian Central Bank and a Member of the Governing Council of the ECB commented that he believed that the ECB would end its stimulus programme this year provided the economy continued to improve. Benoit Coeure, a member of the ECB’s executive board, also provided a hawkish backdrop to the Euro commenting that he believed that there was a reasonable chance that bond purchases would not be extended beyond September.

There has been no word from ECB President Mario Draghi who is known to favour caution but neither of these official comments would have been made in direct contradiction to Draghi’s thoughts. The next ECB Council meeting is on 25th January so there is plenty of time for speculation to mount.

Currency moves are generally exacerbated when two currencies such as the dollar and Euro are moving in opposite directions. While the Euro is benefitting from the economic improvement, the dollar is treading water as changes at the Fed. take time to bed-in and the pace of interest rate hikes is called into question.

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Davis accuses EU of “Cherry-Picking”

The first Brexit comments of the New year were made by UK Brexit Minister David Davis in reaction to the statement made in early December by EU Chief Negotiator Michel Barnier in which he said that Financial Services would be excluded from any trade deal. Barnier said that there was no precedent for Financial Services to be included, “it simply doesn’t happen”.

Davis’ comments illustrate the concern of the UK Government that despite offering a deal on UK branches of EU banks in London the EU is going to exclude the UK from the financial passport that allows banks with a license in one EU country to operate it each.

When Brexit talks resume, the transition period is likely to be the first item on the agenda and this will be significant to the UK manufacturing and export sectors since it will provide guidance and possibly allow investment to return which could feed through quite quickly into the economy.

It has become the norm that optimism grows during the interval between talks only to be dashed as reality sets in. The EU have given no indication that they will make concessions to the UK while the way the UK dealt with stage one means that a hard Brexit is almost certainly impossible to countenance.

Dollar on the back-foot

The dollar had a significantly poor 2017 and that weakness has continued into the New Year. President Trump was at pains to comment quite early in his Presidency that he felt that the over-valuation of the dollar was giving an unfair advantage to the United States trading partners and it had to stop. It would, however, be a massive stretch to say that the dollar was and remains, weak by design.

The dollar index continues to fall reaching a low of 91.76 yesterday, well below the previous strong support at 92.50. One of the major themes for the dollar in 2018 is the source and path of inflation. This Friday’s employment report will be the first indicator of how wage growth will feed into the inflation picture.

The headline is expected to be around 200k which is a positive result but traders and analysts’ eyes will be drawn to the hourly wages growth component which needs to be significantly above 2.5% to have a positive effect on inflation as was emphasized in yesterday’s report.

The Euro made a high of 1.2083 yesterday while the pound rose to 1.3601 and continued to rally overnight. Sterling remained in a narrow range versus the single currency initially falling to 1.1216 before rallying to close a little higher on the day at 1.1276.

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.”