Sterling recovers on profit-taking
August 13th: Highlights
- Data to set the tone for the rest of the week
- Dollar falls as concerns over the effects of a trade war grow
- Italian political concerns hit euro
Sterling finds a short-term low
The no-deal pressure remains but as new Prime Minister Boris Johnson grapples with issues over public spending and law and order, he is clearly leaving Brussels to consider the ramifications of a disorderly Brexit.
Today sees the release of employment data for July, with wage inflation unlikely to continue to outstrip consumer prices by such a degree as they have recently. The headline new jobs figure may decline as growth continues to stagnate and the economy falls towards a recession.
Given the low liquidity created by the “August lull”, Sterling’s recovery is unlikely to take it past the 1.2100 level versus the dollar.
Johnson will need to focus again on Brexit when he meets Irish Premier Leo Varadkar in the next few days. It is understood that Varadkar will inform Johnson that Ireland will not agree to a renegotiation of the Backstop Agreement.
Net short Sterling positions on the Commodity Futures Trading Commission Index reached their highest since April 2017 when data was released on Friday.
It seems to be only a matter of time until Sterling breaks1.2000 versus the dollar and at some point, it will reach a low from which it may be able to recover. That rate is still some way away.
Yesterday, the pound reached a high of 1.2106 against the dollar, closing at 1.2074. Versus the euro, it managed to recover to a high of 1.0813, closing at 1.0768.
Concerns over trade war hit the dollar
It has doubtless been said in private but anything President Trump proposes can be countered by President Xi. The outwardly friendly relations between Trump and Xi hide a deep mistrust.
While the markets were confident that there was a relative status quo between the two, the dollar was able to continue to appreciate which may have suited Beijing more than Washington. But since President Trump tried to reverse what was an apparent “natural” process, the stakes have suddenly become higher as the recent short-term depreciation of the Chinese currency has shown.
This is a story that will run and run, maybe even into the next U.S. election. It is hard to decide “which way the chips will fall”, but with China’s penchant for the long game, it may be a long drawn-out process.
The dollar index continued its correction yesterday. It traded to a low of 97.32, closing at 97.44.
Matteo Salvini is something of a “firebrand” politician but can carry huge support simply by his strength of character. It was obvious that once Salvini sniffed a chance that his Northern League were able to take control that a “Palace Coup” would take place.
Now, by far the better supported of the two largest members of the coalition, The Northern League is making its attempt to take control.
This whole issue will resonate in Brussels since it was Salvini who was intent to defying the budget deficit and debt ratios that the EU was trying to enforce. Rome presented a budget that had a deficit of 2.04% of GDP but it was quickly evident that that would never be met and it would be closer to the original 2.40%.
If Salvini’s Northern League can force through their demand for a General Election and manage to win outright, it will create a major constitutional crisis for the EU which may lead to the first nation being forced to quit. From Salvini’s attitude to Brussels, it is almost sure that he would welcome such a decision.
Yesterday, the euro traded with very little direction but managed to finish a little higher against a weakening dollar. It traded a range of 1.1231/1.1162, closing at 1.1215.
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.”