Daily Market Brief – 9 Feb 2017

Bundesbank Hits Back

February 9th: Highlights

  • Strong dollar factor of US policies
  • Trump comments “Absurd”
  • Political worries cap Euro

Economic cycle determines currency values

Bundesbank President Jens Weidmann hit back at recent criticism of Germany over weak Euro. He labelled Trumps comments as “more than absurd”.

Weidmann has been critical in the past of the European Central Bank’s ultra loose monetary policy he commented yesterday that it had been necessary and should be wound down “as soon as the ECB’s inflation target is met”

His comments reinforce the notion that “it takes two to tango”. The effect of a weak Euro and /or a strong dollar are the same. The contention that Germany benefits from a “weak” Euro more than its European partners is nonsense and they (Germany) are the prime sufferers given the growth in their economy compared to their neighbours.

Dollar strength is undoubtedly a factor of the markets perception of the likelihood of interest rate differentials growing in the coming months.

Weidmann’s comments will also have concerned heavily indebted Eurozone nations as he went on to say that “very easy monetary policy cannot solve Europe’s underlying problems and must be wound down as soon as the price stability objective allows it.That should happen even if higher rates worsen the sustainability of individual government budgets or lead to fluctuations in financial markets.”

Germans have an almost manic fear of inflation which is a throwback to the hyper-inflation seen following the first war. It may just been time to “loosen up” a little and support the ECB in creating monetary policy for the whole Eurozone. A job which in itself is fraught with difficulties.

Political risk is also a fear in the Eurozone currently. Polls are showing that in France (anti Euro campaigner) Marine Le Pen is gaining solid support and in Germany Angela Merkel is falling behind.

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Possibility of rate hikes supports sterling

In the U.K. differences of opinion are starting to be seen over the need to tighten monetary policy with one member of the Monetary Policy Committee commenting that last years interest rate cut may need to be reversed “sooner rather than later ”given the solid growth picture and inflation starting to pick up”.

The next MPC meeting is on March 16th and with six weeks data to consider since the Feb.2 gathering, there is likely to be further divergence of opinion.

Sterling appears to have settled into a (lower) range since the majority of Brexit news is in the market. The next test will come once the negotiations start in earnest and how the EU is going to react is known.

For now there is good buying interest below 1.25 against the dollar which may evaporate once formal negotiations begin.

A poll conducted by Reuters this week showed that there is concern over talks turning fractious precipitating a further steep fall. The poll was of 60 foreign analysts so that will have seen 60 different opinions!

If, as we are seeing in the United States, it is economic fundamentals that drive currency values then the pound should remain steady. Interest rates are most likely to firm in the U.K. particularly if inflation starts to pick up at a pace greater than that predicted it last week Inflation report.

Trump set to meet Abe and reiterate “weaker dollar stance”

The U.S. President has done everyone a favour in the past few days and allowed economics to drive markets but that is set to change (again).

A two day summit with Japanese Prime Minister Shinzo Abe will provide Trump with a platform to reiterate that the United States is no longer prepared to sit back and allow countries to manipulate the exchange rate of their currencies to America’s detriment.

The economic reality is something different but the world is learning that President Trump will not allow facts to get in the way of a good soundbite!

Japan is a solid U.S. ally providing useful stability in the Pacific region and Trump will face bigger issues when he, eventually, has to deal with China and their President Xi Jinping who will prove a much harder nut to crack.

China has long been threatened with being labelled a “currency manipulator” by the U.S., a “crime” which carries automatic levies to be placed on its exports to the U.S.

They have managed to stay just on the right side of that accusation and have been trying to limit the outflow of funds from the country.

Today’s data release calendar is pretty empty and the market will be relying on soundbites to add spice to activity. Tomorrow sees the start of the meeting of EU Heads of Government in Malta which along with Trump’s meeting with Abe should provide some interest

Have a great day!

Author Alan Hill Currency Analyst
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.”


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