Sterling awaits Brussels Confirmation
December 12th: Highlights
- EU Summit expected to rubber stamp move to stage two
- Pound recovers with bears on hold
- Dollar tops out ahead of Fed
Move to stage two to provide impetus for Sterling
This is likely to be the lull before another storm. Even though the clock is still ticking down towards March 29, 2019, both sides will want to make sure they are clear in their negotiating position.
The hand of the EU has been strengthened immeasurably by the U.K.’s capitulation over every part of the first stage of talks. This illustrates perfectly that they wish to avoid a “hard Brexit” at any cost and the threat to “walk away” or that “no deal is better than a bad deal” no longer applies. Mrs May has, miraculously, managed to somehow hobble the more hawkish members of her cabinet although there is still an opinion among observers that they will “come again”. The Prime Minister, who appeared close to being toppled by her own Party a few weeks ago, has managed to purvey an illusion of strength following the agreement but there is still an underlying impression that her detractors are just waiting to pounce!
Sterling recovers a little
It is probable that until the EU Summit ratifies the move to stage two, the pound will remain in tight ranges. Today’s data is likely to show that inflation remained unchanged at 3% in November. Yesterday’s data showed that house prices fell by 2.6% in November, their biggest fall overall in five years. In London where the market has been most buoyant prices fell by 3.7% which is possibly an indicator of a seasonal lull.
The fall in Sterling over the past two months particularly versus the single currency is likely to have an effect of producer prices, the data for which will be released this morning. Prices at the factory gate are forecast to have risen by close to 7% following a 4.6% rise in October. Such a rise will, no doubt, be used by the MPC hawks as justification for the rate hike although Mark Carney faces some tough questions at his press conference on Thursday as the need for the hike remains in doubt.
Future Monetary Policy driving the dollar
An “old school” theory is that as the labour market continues to tighten with around 200k new jobs being created every month that this will lead to higher wages which quickly feeds through into retail prices and therefore inflation rises.
The more dovish FOMC members point to the fact that unemployment has been at or below the 5% threshold which denotes full employment, for several months, yet wage growth has been benign at best. Until CPI threatens the Fed’s 2% threshold the FOMC are likely to remain on hold.
The dollar index has been rising steadily over the past week as the certainty over a rate hike has grown. Overnight it appears to have topped out just short of the 94.00 level which has provided resistance recently.
Liquidity remains high with no sign of any issue for now but as this week of major data and monetary policy decisions end’s the market is likely to drift into year end.
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.”