Sterling Lower as Market Waits
January 11th: Highlights
- Recent Rally based on Brexit optimism
- Dollar rattled by Chinese reserve action
- Traders awaiting new factors to provide direction
Sterling lower as traders look forward to inflation data
When it raised rates in early November, the MPC commented that while it expected inflation to fall, it doubted it would to do so without a tightening of monetary policy. Traders are now waiting to see if inflation, which remained unchanged at 3.1% in November, fell in December. The pound made a low of 1.3481 yesterday versus a dollar which was also on the back foot. Versus the Euro, it fell to a low of 1.1271 before recovering but the fall has resumed overnight in Asian trade.
The path for the pound in the short term is difficult to project given that were inflation to fall it would drive an expectation that the rate hike had had the desired effect and no further rise was likely until Q4 at the earliest. However, were the December rate of inflation to rise, it could mean higher rates sooner but would, dependent upon the employment report, mean a widening of the gap between wages and prices.
China flexes its financial muscles
The merest hint of a shift in Chinese purchases of U.S. Treasuries can have a major effect of sentiment for both the bond market and the dollar. Such a scenario was played out yesterday as China signalled that it may be ready to slow down or halt its purchases of U.S. securities. China holds all the cards in this situation, with the Euro starting to exhibit the necessary stability to become a serious competitor to the dollar as a reserve currency even a minor shift in Chinese investment plans could see major rise in the value of the single currency. Yesterday, the dollar index dipped below the 92.00 level before recovering as the euro briefly traded above 1.2000. It closed at 1.1955, a twenty-point rise on the day.
Market awaits new factors
There has been an air of expectation surrounding the pound as the optimism engendered by the agreement reached in December over the move to stage two of talks has fuelled hopes of a smooth transition. It is hard to make such a case in my opinion since the EU demonstrated that it wasn’t prepared to provide any concessions in the first round and by “digging in its heels” managed to drive a capitulation by the UK. The only good news as far as Brexit is concerned is that the threat of a “Hard Brexit” has virtually disappeared which should be positive for the currency if not the Brexit hawks.
In the Eurozone, speculation surrounds the timing of the withdrawal of additional stimulus in the shape of the Asset Purchase Scheme. While the withdrawal will be positive for the currency, there are concerns about the losses the ECB may incur following the fall in value of the bonds they have purchased.
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.”