Daily Market Brief 14 Mar 2017

May Clear to invoke Article 50

March 14th: Highlights

  • Brexit Bill passed in Parliament
  • Sterling falls 0.5%
  • Euro loses ground as rate hike talk subsides

Parliament gives Brexit Green Light

Some eight months after the British public voted in favour of the U.K. leaving the EU, Parliament finally cleared the administrative hurdles to allow the process to start.

Sterling, which had traded up to a high of 1.2225 against the dollar, fell by 0.5%. In addition, it fell by 0.8% against the Euro, although that loss has since been reversed as talk of a rate hike in Europe has faded.

The pound benefitted from Scottish First Minister Nicola Sturgeon announcing that she wouldn’t expect to hold a second independence referendum before spring 2019. However, on the negative side, Scottish opinion polls point to a strengthening of the leave vote although the deal the Government is able to extract from the EU may turn that around.

Theresa May is now free to invoke Article 50 of the Lisbon Accord. In the event that she “presses the button” this week, negotiations could start almost immediately.

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Eurozone rate hike idea fades

Any slim possibility of a Eurozone rate hike melted yesterday as at least one Governing Council member commented that last week’s meeting was not a signal of a change in ECB policy. In the light of these comments by Jan Smets, Banque de France Francois Villeroy de Galhau said he felt that that rising inflation the region was highly exaggerated.

Following these comments, the Euro fell back from Monday’s one-month high and closed almost 100 pips lower at 1.0605.

Eurozone data

Germany releases consumer price data today. Inflation has been steadily climbing over the past few months much to the alarm of the German Government. It must be remembered that the ECB is charged with creating monetary policy for the entire Eurozone so individual countries data can be of no more than academic interest.

Today’s release of Eurozone-wide Industrial Production data will have a far greater bearing on the ECB.

Traders suspicions have been raised about the source of the rate hike rumours given German comments about the need for a stronger Euro and higher interest rates to aid their economy which is in danger of overheating.

Fed hike tomorrow but then what?

Following last Friday’s better than trend employment report a rate hike by the FOMC tomorrow is now certain. Coupled with the data, President Trumps economic policy, should add to the Fed’s hawkishness and four hikes this year is a possibility.

However, the volatility seen in the Eur/Usd exchange rate yesterday showed that traders are not confident of a consistent strengthening of the dollar.

Another key point is how the President is going to deal with the re-selection of Janet Yellen when her term is up at the end of the year. Given the criticism that she has faced from both the Administration and Congress it is likely that she will be replaced.

The FOMC chair is a very sensitive issue for the markets, given who has gone before, so this is one appointment Trump cannot afford to get wrong.

Since the hike became certain the dollar has fallen but the base it has formed 100.50 on its index looks strong and can provide a base for further gains. For one thing, the trajectory of interest rates in the U.S. is different from almost every other member of G8. For another, it is still to become clear how much Trump’s infrastructure plans will add to growth and inflation.

Chinese industrial production continues to grow

Chinese industrial production remains above 6% YoY following data released overnight. The Australian dollar, which traders use a proxy for Chinese activity, rose initially but fell back close to its opening level as its own business confidence data registered a fall. The 0.7500 area sees good buying interest for now but sellers have orders ranged between 0.7600 and 0.7620 which should cap any short term advance.

Chinese retail sales also fell in February from 10.9% to 10.5% but in such a vast country, this is well within the margin of error. Any read above 10% shows that inflation in the Chinese economy is still uncontrolled despite the efforts of the BoC.

For this reason the Central Bank has to remain vigilant and create a monetary policy that can provide decent growth and controlled inflation. They are still, relatively, “new to the game” of free market economics and still have some way to go before the Yuan can become a real threat to the dollar as the pre-eminent reserve currency.

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.”