Daily Market Brief 15 Aug 2018

Average earnings fall hits Pound

August 15th: Highlights

  • Reason for rate hike questioned
  • Dollar rally continues as EM markets fall
  • Euro in thrall of dollar strength

Wages remain below inflation

Harold Wilson, a famous U.K. Prime Minister from the 1960s, coined an expression: “the pound in your pocket won’t change in value”. He was referring to a devaluation and his words were misleading at best.

The value of the pound in British people’s pockets in 2018 is definitely changing and for the worse. Yesterday’s employment report showed that unemployment is (apparently) at its lowest level since 1975. However, the more believable statistic, that of wage inflation, showed a fall from 2.5% in June to 2.4% in July. With CPI at 2.6%, real earnings continue to fall.

This illustrates perfectly, the entirely spurious nature of the recent rate hike which now appears to have taken place purely to provide a slightly higher platform from which to start to cut, if necessary, post-Brexit. The hike has added a further interest burden to borrowers both corporate and individual, but banks have failed to raise savings rates.

With the outcry over a no deal Brexit dying down, a recovery for the pound could have been expected. However, today’s inflation report is unlikely to send it a great deal higher with headline CPI likely to remain at 2.6%.

Brexit remains Britain’s strongest economic headwind, but while the data is unsupportive there can be no rally for Sterling even during a lull in the rhetoric.

Yesterday, the pound reached 1.2704 versus the dollar before closing at 1.2722. It has now closed lower on ten of the past twelve days.

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Dollar strength showing no sign of abating

The recent rally in the dollar index, since it broke technical resistance at 95.25, is showing little sign of slowing down. President Trump constantly rails against other nations deliberately putting in place policies that weaken their currencies. However, Trump’s fiscal policies of cutting taxes and borrowing to fund infrastructure projects can be nothing but positive in their effect on monetary policy and therefore the dollar.

Since the dollar is also the global reserve currency, its value is affected by global tensions and issues. The continued meltdown being seen in the Turkish lira is already spreading a “flight to excellence” amongst emerging market currencies.

Economic data emerging from the U.S continues to support a gradual increase in rates, but levels of debt are rising and starting to bring concern. The goldilocks growth data fed by one-offs is unlikely to surprise the upside in the foreseeable future and with midterm elections in a few months, the dollar may be approaching a cyclical high.

Nevertheless, the dollar’s short-term rally continues, reaching a high of 96.79 yesterday and continuing to gain overnight.

With Labor Day still a couple of weeks away and liquidity thin, there seems little possibility of a short-term correction, although if it were to happen it could be violent.

Euro dancing to greenback’s tune

The contagion with emerging markets could easily start to affect developed markets with a direct link to Turkey, like France and Germany, in the coming days/weeks.

The German Dax stock market has already fallen to a major support level on fears of the German bank’s exposure to Turkish borrowers with French, Italian, and Spanish lenders also exposed.

The ECB provides little or no encouragement to those looking to buy the single currency and with outside influences turning negative, the longer-term outlook remains negative.

There has, however, been discussion recently about just how low the euro would need to fall to attract the attention of the Central Bank. It is the pace as well as the absolute level of any fall that would raise concerns, but the consensus appears to be that a test of support at 1.1080 versus the dollar may raise more than a few eyebrows in Frankfurt.

Yesterday the euro remained driven by the dollar’s strength and the Turkish crisis. It reached a low of 1.1330, closing at 1.1344. Versus the pound, it was virtually unchanged on the day closing at 1.1208, having opened just four points higher.

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.”