Sterling runs into Brexit Concerns
January 4th: Highlights
- Transition and trade deals vital
- Fed Minutes point to rate hikes
- Euro takes a breath
Pound lower as new factors fail to emerge
There are no tangible reasons to buy Sterling until there is a more concrete set of proposals in place for the length and terms of the Brexit transition period together with some progress on what can be expected from any trade deal. Sterling faces headwinds as the economy continues to struggle, consumer confidence dries up and the potential for a widening of interest rate differentials remains.
The pound fell back into its familiar range yesterday making a low of 1.3494 versus a recovering dollar and 1.1236 against the Euro. When studying charts of currency moves over the past month or so, the pound has been within close to a one-hundred-point range against the single currency as would have been expected as new factors fail to emerge. As speculation grows concerning a tightening of interest rate policy by the ECB, the pound could suffer by comparison.
Following the lack of preparation that marked the start of Brexit talks, analysts are expecting a more cohesive set of proposals from the UK Government despite the surprise from the EU side that nothing had been done in this regard prior to the agreement to move to stage two.
Fed Minutes more hawkish than expected
As it turned out, despite concerns over the path and, more importantly, the source of inflation within the economy the Fed. views the strength of the employment market and the economic expansion as drivers that will lead to “several” rate hikes in 2018.
The dollar index recovered almost all its losses from Tuesday although it has fallen back a little overnight. It made a high of 92.25 yesterday and has dropped to 92.09 overnight. Tomorrows employment report will provide short term direction. Updated expectations put the headline number a shade lower at +180k new jobs but, being such a volatile number, it is hard to predict accurately.
Jerome Powell will take over at the Central Bank. on February 3rd and Janet Yellen will leave after many years in several positions with the Fed. While she lacked the charisma of her two predecessors she possessed the determination to ensure that the crisis that engulfed the global economy didn’t lead to disaster.
Euro pauses following steady climb
The ECB differs from the Fed in that its Council Members tend to present a united face to analysts and reporters expressing the views of the group more or less forcefully than the President, Mario Draghi but never contradicting the view of the majority. In this way, the ECB rarely shocks at its news conferences and the same is likely following the meeting in a few weeks time.
In the meantime, speculation mounts regarding the withdrawal of the Asset Purchase Scheme. There is no doubt that the Eurozone economy is growing and expanding at possibly a faster level than was seen through the third quarter of 2017. The preliminary GDP data, not due until next month, could surprise to the upside. Sr. Draghi’s last comment regarding the “additional measures” was that they would stay in place until November but given the comments of ECB members over the past few days, the speculation is that they could be gone by September. The Euro corrected a little yesterday falling to 1.2001 against the dollar while remaining in a narrow range versus Sterling.
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.”