Daily Market Brief 8 January 2018

Sterling Steady as Market awaits Brexit Talks

January 8th: Highlights

  • Cautious optimism remains
  • Eurozone inflation starting to climb
  • U.S. employment data weaker than expected

May under pressure to “act tough”

The pound continues to trade at close to its highest level since the Brexit referendum as traders await news about the stance the UK is likely to take when Brexit talks resume. The first order of business will be the length, scope and conditions of the transition period. UK businesses have been holding back on investment until they have some idea of what business conditions will be like going forward. The announcement of a transition period will at least provide a temporary set of rules by which the can operate.

Versus the dollar the traded up to 1.3583 on Friday but has fallen back to 1.3557 as Asian trading has opened overnight. Against the Euro, Sterling made a high of 1.1276 on Friday and has traded sideways in Asia.

Whilst cautious optimism remains, there is the risk that the EU will make unreasonable demands over trade since they cannot be seen to be allowing nations outside the group to have unfettered access to the single market which is the “Jewel in the Crown” of EU membership. If the UK faces tariffs and restrictions, the pound could fall to the lows last seen in the immediate aftermath of the referendum.

The weekend press was full of stories of a Cabinet reshuffle taking place today although Mrs May’s primary “Hard Brexit” adversaries; Boris Johnson, Michael Gove and Liam Fox are slated to retain their roles.

Considering your next transfer? Log in to compare live quotes today.

Eurozone inflation to bolster single currency

Preliminary inflation data for December was released on Friday covering the entire Eurozone. It showed that prices are starting to rise across the region.

This is one of the conditions that ECB President Mario Draghi has said need to be seen for the Central Bank to start the withdrawal of additional stimulus. November inflation was adjusted up from 0.9% to 1.1% and the headline for December was also 1.1%, a little higher than analysts’ expectations. Despite this stronger than expected data, the Euro fell to a low of 1.2020 versus a dollar which was reacting to its own economic data releases.
There is a strong base developing above the 1.2000 level for the Euro and should there be positive comment regarding a tightening of monetary policy at the next ECB meeting which takes place in a couple of weeks, there could be further gains, possibly towards a test of the multi-year high at 1.2520 going forward.

Business confidence and retail sales data will be released this week. Confidence has been growing steadily while there was a surprise fall in consumer activity Eurozone-wide in November. That is likely to be reversed in December with MoM sales reaching 1.3% after the 1.1% fall.

Dollar Rallies from lows driven by NFP data

The employment report released on Friday in the U.S. showed 148k news jobs were created in December, significantly lower than traders’ expectations. However, the figure for November was revised higher from 228k to 252k. This showed just how volatile a report this is since in many categories it relies on estimates and averages.

While the headline is the “attention grabber” as far as traders are concerned, and the dollar rallied following the release, it is the data on wages that interests economists and the FOMC.

Average hourly earnings remained at 2.5% as expected, and unchanged for the past few months.

Despite the lack of wage inflation, the interest rate futures markets are still predicting two rate hikes in 2017 with the first probably taking place in March. FOMC Member and San Francisco Fed. President John Williams was a little more hawkish in a speech expecting three hikes this year as the economy receives a boost from the tax reform bill and the economy continues to grow.

The dollar index which fell to a low of 91.77 four times last week rallied a little to make a high of 92.09 a move which has been maintained in Asia with the index reaching 92.14.

This week’s events of note

The first full week of the year, Politics could overshadow Data

  • U.K.: Possible Cabinet reshuffle – Damian Greene’s replacement to be announced. Hunt, Johnson and Davis all appear safe (for now)
  • Eurozone: German Coalition talks begin – Martin Schultz in difficult position. He favors a Grand Coalition, his Party doesn’t
  • Eurozone: Industrial and Manufacturing confidence – Improving every month. An increase from 114.50 to 115 likely for December.
  • Eurozone: Retail Sales – An improvement expected after a MoM fall in November.

  • Eurozone: ECB Non-monetary Policy Meeting – The withdrawal of the Asset Purchase Scheme likely to be discussed, but there will be no announcement or press conference.

  • UK: Industrial and Manufacturing Production – Production slowing to a halt as investment continues to be cut.

  • Eurozone: ECB Monetary Policy Meeting Accounts – The minutes of the last meeting. The comments are unattributed but the sentiment of the meeting is the most important take-away.

  • China: Trade Data – A wide ranging report that has consequences for most of the industrial world but most significantly for Australia who supply China with ram materials
  • U.S.: Retail Sales – Retail Sales
  • U.S.: Inflation – Inflation

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.”