Daily Market Brief 9 January 2018

Political Risk Remains as May Shuffles

January 9th: Highlights

  • Nothing new as Cabinet big guns remain
  • Euro slips as traders take profit on long positions
  • Two or three hikes? Dollar rallies on rate hopes

May careful to balance Brexit opinion in Cabinet

UK Prime Minister Theresa May took the opportunity to “freshen up” her Cabinet yesterday as she moved to replace Damian Greene her No.2 who was forced to resign recently. The “big guns” from both sides of the Brexit discussion remained in place although there were a couple with additional portfolios added to their responsibilities.

Mrs May has been careful to ensure that she receives balanced opinion from her senior ministers as she prepares for the resumption of Brexit talks. As is always the case in these situations, rumours of the Prime Minister’s motives swirled around Westminster all day but in the end the effect was purely cosmetic as she acknowledged some of the “rising stars” of her Party.

The pound rallied against the Euro as the single currency’s recent rally ran out of steam. It reached 1.1343 before closing at 1.1336 and has continued to climb, albeit at a slower pace, overnight, reaching 1.1350.

The outlook for Sterling remains dominated by the upcoming start of talks on stage two of Brexit, with the length and terms of any transition period being the first item on the agenda. It was rumoured that Theresa May was going to appoint a Minister to deal with preparation for a “Hard Brexit” but in the end, nothing happened. The threat of a no deal scenario has virtually vanished following the capitulation over the terms of stage one agreement.

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Euro on back foot as inflation concerns fade

The single currency fell versus its G7 partners currencies yesterday as traders took profit on long positions. There was a feeling that expectations of the removal of the Asset Purchase Plan and a tightening of monetary policy had got a little ahead of themselves as Friday’s inflation data was studied in more detail. It is often the case that the currency will rally based upon the headline only to regroup once analysts appreciate the full extent of the information at hand.

The Euro fell to 1.1955 breaking down through both the psychologically important 1.2000 level and major support at 1.1980, which had proven to be stubborn resistance during the recent rally. Versus Sterling, the story was similar although the pound remains vulnerable. Traders had reacted to a slight increase in the rate of inflation in December across the entire Eurozone together with marginally hawkish comments from two ECB Council Members but came to realize yesterday that unless inflation threatens the Central Bank’s 2% target and President Mario Draghi changes his dovish tone, Eurozone monetary policy is unlikely to change. There is a non-monetary policy ECB meeting this week where the timetable for withdrawal of additional measures may be discussed, but it is unlikely there will be any advance guidance yet.

Dollar reacts to Euro fall and rate hike prospects

The dollar index retained the gains it made on Friday following the fall in the euro yesterday. The focus of traders’ attention is firmly on the prospects for rate hikes over the course of 2018. There is some disagreement over whether the FOMC will hike two or three times.

As growth and inflation remain benign in the Eurozone, the prospect for a further dollar rally remains although G7 countries’ economies are showing potential to emerge from the extended period of low rates that have been in place since the financial crisis. The dollar index rallied to a high of 92.39 yesterday closing close to the days high. The next resistance level is 92.66 although a lot will depend on the performance of the Euro and whether yesterday’s correction turns into a more significant move.

New FOMC voting member Raphael Bostic, the Atlanta Fed President, revealed a driving side yesterday, commenting that the Fed may only hike twice given the lack of follow through in pricing pressures. This week’s inflation data will provide some clarity although the new Fed Chair Jerome Powell will want to see a series of higher inflation figures before turning hawkish.

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.”