Daily Market Brief 4 December 2017

Brexit Optimism Waning

December 4th: Highlights

  • May to meet Juncker today
  • Sterling in narrow ranges
  • Dollar receiving mixed signals

Brexit deadline expires

The absolute deadline for the U.K. to deliver sufficient progress over three major issues arising from Brexit expires today. This is for the negotiators to have time to brief EU Heads of Government before their summit next week where there is growing expectation that the green light will be given for talks to progress to the next stage.

Over the weekend leave supporters in the U.K. voiced their concerns over the number of concessions that the U.K. has been forced to make as the process has progressed. The EU has adopted a fairly intransigent stance which has disguised concerns in Brussels over the rise of nationalism across the region.

The pound has been reasonably well supported as hopes have risen over a Brexit breakthrough although it has been unable to break significant resistance levels as fresh buyers await confirmation.

Sterling consolidated against the Euro on Friday reaching a high of 1.1378 before falling back to close at 1.1329. As the Asian market has opened this morning it has risen slightly reaching 1.1384 before again suffering from a bout of profit taking and is currently close to unchanged.

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Dollar mixed as it reacts to variable influences

The drivers for the dollar are becoming more varied almost daily as the dollar index is first pushed one way then back again. Russian election meddling, the fiscal reform bill, Michael Flynn admitting lying to the FBI, Donald Trump’s alleged interference, a member of Trump’s “inner circle” being in contact with Moscow during the election campaign, all nicely topped off by this week’s employment report and an upcoming pivotal FOMC meeting mean that the dollars path is difficult to predict.

The dollar index fell to close to its recent low on Friday reaching 92.60 before rallying as the news of the passing of the Fiscal Reform Bill reached traders. Overnight it has opened a little stronger reaching 93.18. Individually, versus Sterling, the greenback opened weaker in Asia this morning falling to 1.3515 but quickly regained its composure and is currently virtually unchanged from the open at 1.3457.

It is hard to say how influential the unfolding political scandal will be on the dollar. It hinges on two major points; were members of the Trump election campaign in contact with Russia prior to the election and how much involvement in, or knowledge of, event did the President have. Whatever the outcome, this story is likely to run for some time to come.

Data influences still the primary driver for currencies

During the fourth quarter the theory has been reinforced of just how important monetary policy is to exchange rates. We have seen the dollar become almost solely dependent upon interest rate differentials as its only source of strength. The issues swirling around President Trump are mere noise compared to traders view on the level of probability attached to a rate hike at next week’s FOMC meeting.

The pound reacted poorly following the rate hike on November 2nd, simply due to the exceedingly dovish comments that followed the hike. In the brief period between the announcement and the press conference the pound rose significantly only to be sold off when it became clear that rate hikes would be at a premium over the next three years.

Mario Draghi, the President of the European Central Bank has been strident in his view that monetary policy in the Eurozone is designed for the region as a whole and the individual nations macroeconomic data more of a distraction driving irrational expectations. Eurozone-wide inflation is benign at best while growth is beginning to improve providing Sr Draghi with a “rainbow scenario” where he can provide the weaker economies with continued accommodation and support.

This week’s employment report in the U.S. will provide the usual jamboree but it will be the detail particularly around wage inflation that will interest traders and analysts the most.

This week’s events of note

The delayed U.S. employment report will be released on Friday but Brexit is again likely to dominate with.

  • Eurozone: Producer Prices – A figure of less than 3% will confirm benign inflation data further down the road
  • Greece: GDP – An expectation of 1% YoY growth from a country that was a”basket case” until recently is a testament to the EU Commission’s tough stance

  • Australia: Rate decision – The minutes of the previous meeting gave sufficient advance guidance that there is to be no change in rates in the short/medium term
  • Eurozone: Purchasing managers indexes – Solid expansion in both manufacturing and services confirm that growth is becoming self sustaining and the withdrawal of support could be sped up
  • Eurozone: Retail sales – The support of the consumer is not as vital as in the U.K. or U.S. but the economy is receiving it anyway!

  • Eurozone: Non-monetary policy ECB meeting – Mince pie anyone?
  • Canada: Rate decision – Following a hike earlier in the year, a steady as she goes policy has been adopted with n o further change likely until Q2 ’18

  • Eurozone: Q3 GDP – a solid 2.5% YoY number should prove sufficient for the ECB to maintain policy

  • U.K.: Industrial Production – Industrial Production
  • U.S.: Employment report – Employment report

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.”