Daily Market Brief 13 March 2018

Sterling unable to break resistance

March 13th Highlights

  • Rate hike in question as Brexit weighs
  • U.S. inflation data set for release
  • Euro struggling within narrow range.

EU Summit looms without transition agreement in place

On 22/23 March, the EU Heads of Government will meet and item one on the agenda was intended to be the ratification of the Brexit transition agreement between London and Brussels. While it is entirely possible (if unlikely) that an agreement is close, since negotiations have gone behind closed doors, traders are probably faced with yet more Brexit disappointment.

It is fast becoming clear that the EU is not going to cede any ground in talks, and any thought that this is a negotiation rather that a dictation of terms is receding quickly.

As we approach the anniversary of the triggering of Article 50 of the Lisbon Treaty, neither side has covered themselves in glory. Brussels has proved, as it does in most of its daily activities, to be rigid, unwavering and incapable of even a slight change in course. The UK Government has dithered, unable to agree amongst itself what Brexit truly means and left itself exposed by a series of poor decisions not least of all was last year’s General Election.

Sterling has performed well this year considering the turmoil that awaits. Traders have allowed it to become reactive to the dollars movements and the belief that the Bank of England is sufficiently hawkish to hike rates in May.

The 1.4000 level remains elusive as the pound made a high of 1.3918 yesterday. Versus the single currency, the pound rallied to 1.1300 before falling back to close at 1.1273.

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U.S. Data a reliable driver than trade rhetoric

Last Friday’s employment report in the U.S. could best be described as mixed with a far stronger headline but lower than expected wage inflation.

The dollar remains hemmed in by the clear determination of the Administration (no matter what Trump says in public) to weaken the dollar, while the economic data is generally supportive.

Today sees the release of consumer inflation data which is expected to show that price increases are starting to rise. A month on month rise from 2.1% to 2.3% is probable with a slight increase in the yearly figure. Inflation is growing slowly, but sufficiently to maintain the Fed’s rate hike policy with the first of this year’s rise taking place next month.

Last week’s trade war concerns have faded somewhat with the toothless increase in tariffs on aluminium and steel having little effect.

The dollar index has held onto its gains trading around the 90.00 level, but it needs to break above 90.50 to sustain momentum. It is hard to see today’s data having sufficient impact and with the Euro at the bottom of its recent range, it may fall further since rate hikes are well priced-in by the market.

Euro struggling to gain a foothold

Much to the veiled delight if Mario Draghi, the single currency appears to have settled into a lower range, hemmed in versus the dollar between 1.2260 and 1.2420. Sr Draghi’s concern over any sustained strength in the single currency is well documented.

It seems that the 1.2520 level has become his new “line in the sand” which will be protected by the only means at his disposal; his ability to make the market listen when he speaks. The overriding concern that a stronger currency will have a similar effect to a tightening of monetary policy on weaker Eurozone economies pervades the thoughts of the ECB despite German concerns that inflation is about to take off with the ECB ill-prepared to react.

Tomorrow three members of the ECB Governing council, including Sr Draghi, will be making speeches and it will be interesting to see if the all “sing from the same hymn sheet”. So far there has been a marked continuity from the ECB which will probably continue. While data continues to show an expansion in the economy, but inflation remains benign, the ECB will feel little pressure to change anything, living by the doctrine “if it ain’t broke why fix it?

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.”