Daily Market Brief 7 December 2017

Sterling holds its breath

December 7th: Highlights

  • Irish border issue far from a solution
  • Traders ignoring wider ramifications
  • Dollar index climbing on rate expectation

UK instability set to continue

The outcome of the next forty-eight hours could go a long way to shaping the fate of several aspects of the British political landscape, the direction of the currency and the future path of monetary policy.

There is continued optimism that a deal can be agreed but there is still a massive underestimation of the rift that exists between the Irish Republic and the North. The economic fate of Ireland is inextricably tied to the U.K., yet the EU takes little notice of historical ties continually looking to ringfence its members against outside influences. Given all that has gone before, it was naive in the extreme for either side in the negotiations to expect the issue to be resolved easily.

Market analysts are still attaching high levels of probability that a deal will be done before tomorrow’s deadline. Sterling continues await the outcome, drifting lower yesterday as the optimism of the first half of week evaporated. Against the single currency it fell to 1.1295 before recovering to close at 1.1346, although it has retained a weak bias overnight. Versus a dollar which is buoyed by a probable hike in interest rates next week. Sterling reached a low of 1.3358 and has remained weak in Asian trade.

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Market facing a big week with liquidity in doubt

Normal trading conditions are likely to disappear after tomorrow as traders close their books for the Christmas holidays. However, next week has the potential to be one of the most significant weeks of the year with several influences all converging on each other to provide a perfect storm of data, monetary policy and politics.

Brexit will dominate but there are Central Bank meetings in both the U.K. and U.S. The MPC meeting will be dominated by Mark Carney’s press conference where he will be expected to comment on the inflation data that has been released earlier.

If core inflation has risen to the 3.2% level that analysts are predicting, the effectiveness of the rate hike will be called into question. If it remains at 3% or falls to 2.9% he will be able to say the hike was effective but will be asked if that is not simply the peak that was predicted in any case by the Quarterly Inflation report?

One of the other interesting aspects of the MPC meeting will be the outcome of the vote itself. Were the hawks satisfied by the hike or do they see the need for another? MPC members have been quiet recently in expressing their views so voting intentions remain clouded. The current furore around Brexit is likely to drive caution and Carney is sure to be asked if he would have sanctioned a hike had he been aware of political storm that was gathering.

US Data to go some way to confirming rate hike

Tomorrows employment report in the U.S is being seen by traders as a confirmation or otherwise of the rate hike that is expected to take place next week. The headline number, which is something of a lottery given the number of parts of its makeup that are estimates or in some cases, best guesses, tends to be ignored nowadays with the other parts of the report gaining in importance.

A headline of something close to +200k new jobs is most analysts “guesstimate”, but it is the hourly earnings that will exercise the Fed. There are concerns as to where the inflation that will need to be controlled by tighter monetary policy is going to come from and its origins should be seen in an increase in pay, particularly since the labour market is tight with the unemployment rate close to 4%. A rise in the rate of growth in hourly earnings to close to 2.5% month on month will allow FOMC members to have a reason to hike with a clear conscience.

The dollar index remains within its recent range although it has risen over the past three days making a high overnight of 93.68. It faces resistance at 94.00 and given the expectation for the coming hike, the risk is for a downside surprise.

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.”