Daily Market Brief 14 May 2018

Actions Speak louder than words

May 14th: Highlights

  • Bank of England unlikely to hike in 2018
  • Dollar corrects as good news fades
  • Single Currency stuck between 1.1880 and 1.2000

Sterling steadies but upside potential limited

FX market traders have chosen to ignore the potential economic disaster facing the U.K. from Brexit preferring to concentrate on the prospects for a rate hike from the Bank of England following the “volte-face” performed by the Central Bank in the run-up to last week’s Monetary Policy Committee meeting.

Even the staunchest leave campaigner admits that the early stages of the U.K.’s departure from the umbrella provided by membership of the single market is going to see a further slowdown in activity no matter what the long-term benefits are. However, interest rates are what excites traders right now so that is where attention is focussed.

Inflation data for April will be released next week and since the MPC will have had some advance idea of what the data would look like we can assume that it has not risen but given Sterling’s recent fall it may be unchanged.

This week sees the release of employment data. Wage growth will be the main topic of attention with average earnings likely to have fallen back a little to 2.6% from March’s 2.8%.

Sterling remained in a narrow range on Friday reaching a high of 1.3596 before falling back to close at 1.3543. With so many potential influences over the currency further volatility is expected but it’s unlikely that potential rate hike will be a driver for a while.

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Dollar in need of fresh impetus.

Back in February, President Trump disagreed with comments made by his Treasury Secretary that the U.S. needed a weaker dollar to stimulate growth and make U.S. exports more competitive. Trump’s idea was slightly different he decided to place tariffs on the import of a number of the U.S.’s competitors goods to make the less attractive.

He felt that the U.S. would benefit the most from a strong dollar and whether as a by-product or not, the dollar has rallied from that day to this. Trump’s attention to foreign policy may be ignoring the very real issues that are facing the domestic economy, but he clearly feels that dealing with Iran, North Korea and standing up to both China and Russia is the way forward.

Now, the dollar appears to have topped-out. The string of positives has dried up and it is hard to see where further foreign policy “wins” will come from.

The dollar index is struggling to hold onto recent gains and is trading right on a support that was created during the dollar’s recent rally.

The inflation data released last week will have discouraged those who are looking to a June hike from the FOMC and in the absence of any further “rabbits being pulled from hats” by the President, attention will turn back to the economy and that could see the dollar correct further.

Euro remains “under the radar”

The Eurozone is such a monolithic yet immature beast that it is still hard to understand just what the primary drivers of the economy are. Is it essentially a strong region driven forward by the economies of Germany, Belgium and the Netherlands or potentially weak, as issues form larger economies like Spain and Italy, combine with the likes of Greece and Cyprus to continually drag the economy lower?

Over the almost twenty years of its existence, the eurozone and single currency have been so bombarded with crises that it is only now that it is able to develop its own “personality”. It is not difficult to understand the stance taken by ECB President Mario Draghi where he continues to provide low rates and further accommodation to an entire region dominated by economies devastated by the financial crisis even though that was ten years ago.

The ability of the ECB to exert financial discipline on nations that continue to have their own fiscal policy is something that will be focussed upon by Draghi’s potential successor German Bundesbank President Jens Weidmann.

The euro remains a side issue to traders, driven by the volatility of the dollar. It seems that any attempted move higher will be countered by the ECB as it tries to maintain an essentially weak currency to further help weaker economies export.

On Friday the single currency traded in a narrow range hemmed in by the psychologically important 1.2000 level and support at 1.1880. It closed at 1.1941 and has rallied a little from there overnight.

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.”