06 January 2020: Sterling in a downtrend

Sterling in a downtrend

06th January: Highlights

  • Data shows how far the UK must go
  • FOMC conflicted but see present monetary policy as adequate
  • Several polls see Eurozone economy slowing further. Any recession to be shallow

Time for Government to get to work on growth

The UK economy has been “protected” over the past year at least by Brexit concerns camouflaging its real direction. The Bank of England has had little option but to “go with the flow” and retain its interest rate policy in a manner which points to the balance of risks being to the downside.

The latest activity data was released on Friday and showed an economy that continues to struggle despite the election result and the fact that Brexit is now all but confirmed.

The talks on trade between London and Brussels are due to commence early next month following a bout of brinkmanship from both sides. If there is a degree of optimism from Brussels to match London’s bullishness, then Sterling could rally, but for now the market is focussing on some pretty dire economic data.

Construction activity fell from 45.3 to 44.4 while consumer credit activity fell substantially between October and November.

The Military action in the Gulf by the U.S. was not discussed in advance with the UK and this has led to concerns over a rift. Since Trump is unlikely to want to consult or even discuss Foreign Policy decisions this is a concern that will soon disappear as trade talks get underway later in the year.

The pound fell to 1.3053 versus the dollar, closing at 1.3076. The 1.30 level is a major support level and any test is likely to be rejected initially.

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Risks tilted to downside

Given the small margins the Fed is working to, a description of the balance of risks being tilted one way or the other means very little. The FOMC has shown that one or two rate changes means very little in the grand scheme and is more of a signposting than any significant indication of future changes in the cycle.

The Military action that was undertaken by the U.S. has hit asset prices hard and seen the dollar index recover from its recent lows as risk aversion returned. The Dow Jones Index fell from its recent all-time highs while Brent Crude rose by around 4%.

While there are several issues that will continue to affect the dollar’s value; the start of phase two of trade negotiations with China and the diminishing no deal questions over Brexit for example, at home the economy is beginning to drive discussion.

The Fed seems satisfied in the short term but there are plenty of senior commentators and Central Bankers concerned over rates staying too low for too long. Long-term goals will not be discussed at the January meeting of the FOMC but will be revisited mid-year. Jerome Powell the Fed Chair is a man who is against constant tinkering allowing changes in policy enough time to take effect before a review takes place.

This week the eyes of the market will turn towards the Employment Report for December. Early indications point to a consolidation of November’s stellar recovery but one thing that is clear from recent releases is the volatility of the data and the quite substantial revisions that are often seen.

Average initial predictions are conservative calling for an increase of just 160k new jobs created while a downwards revision of November’s data is entirely possible.

Before that, composite activity data will be released which is likely to show a healthy (in global terms) 52.2, unchanged from December.

The dollar index clambered back above resistance at 96.80 on Friday reaching a high of 97.10 and closing at 96.88.

A recession is a recession no matter how shallow

It is the time of year when certain analysts and commentators like to “put their heads above the parapet” and make predictions about the global economy and its constituent parts over the next twelve months. Very few of those “market experts” publish a report on how they did twelve months on, so we can assume that it is probably better to use what we know rather than a “crystal ball”

What we do know is that the Eurozone economy is still under severe pressure from the slowdown in the more substantial industrial states, most prominently Germany.

As we have mentioned recently, the Eurozone economy is tangled up in the bureaucratic mess that is the EU Commission and it is unlikely that any major developments to stimulate growth will happen in Q1.

Analysts still see the single currency as little more than a makeweight in the dollar index given its significant weight in the basket. However, the euro has very little momentum in any direction and most traders will simply say “sell any rally” if asked for their view right now.

The hopes of the entire region rest upon plans (hopefully) being discussed by EU Commission President Ursula von der Leyen and ECB President Christine Lagarde concerning fiscal union.

Meanwhile the data that comes out is never surprising, even when weaker than expectations and this leads to a currency that has lost its fascination and momentum.

The euro lost ground to a stronger dollar on Friday, reaching 1.1124 and closing at 1.1161. While tensions in the Gulf remain heightened, the 1.1220 level looks a very long way off.

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.”