Sterling Calm Before the Storm
Morning mid-market rates – The majors
March 12th Highlights
- Brexit dominates despite Manufacturing growth
- U.S. employment data provides mixed signals
- Monetary policy concerns hold Euro back
UK facing transition concerns
The EU cannot countenance anything other than a solid border between the North and South unless the North remains within the customs union in which case the border would be in the Irish Sea.
The UK Government is left with a dilemma due as much as anything to Mrs May’s reliance on the Democratic Unionist Party to keep her Government in power and therefore cannot accept any proposal which marginalizes the North. Added to this, Donald Tusk the EU Council President is pressuring London to come up with an alternative proposal where none seemingly exists.
Sterling has held up will versus both the dollar and Euro over the past week but faces a tough time as the Brexit headlines start to reappear. It reached a high of 1.3911 last week versus a dollar which was mixed at best and 1.1266 against a euro which faced its own monetary policy issues.
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U.S. Employment data typically uncertain
The headline new jobs figure is notoriously unpredictable since it contains several estimates as well as hard data. February’s +313k was up from January’s already upwardly revised 239k. Whilst this single month won’t change the markets perception of the rate hike scenario for the U.S., the base case three hike strategy appears to be the most likely to be implemented given the current data.
The dollar index had a better week as the U.S. trade position became clearer. A trade war is unlikely given the number of “free passes” the administration is going to allow over the new 25% tariff on imports of steel and aluminium.
Tripartite talks have been taking place between the U.S., EU and Japan over trade restrictions and as long as all parties are talking the effect on the market will be minimal. The index made a high of 90.37 last week but needs to break solid resistance at 90.50 before its recovery can be considered complete.
Euro in doldrums as Monetary policy weighs
It is easy to say that the global economy has entered a new low interest rate environment as inflation is benign in nearly every major economy (the UK being the exception) but it will take a long time and more evidence before such a theory can be considered proven. In the meantime, fears continue that the ECB will fall behind the curve and be caught out if inflation starts to pick up.
It remains a distinct possibility that Sr. Draghi could leave office at the end of his eight-year term in November next year never having raised interest rates. That will be as much due to his dovish nature as to the extraordinary circumstances that have prevailed during his tenure.
The euro fell last week following the dashing, yet gain, of hopes that there would be a signal of a hawkish change in policy. It reached a low of 1.2269 but has since regained the 1.23 handle recovering to close on Friday at 1.2306
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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.”