Sterling at Post-Referendum High
January 15th: Highlights
- Spanish and Dutch Finance Ministers want UK to be “close to EU”
- Euro higher as tapering hopes continue
- Dollar index at lowest since Jan 2015
Pound rises 1.5% versus weakening dollar
There are two reasons for this move higher for the pound to be considered fragile; first, the two countries are only two of 27 and second, they are likely to be countered by Germany and France who favour far sterner conditions for the UK.
Inflation data will be released for the UK for December later this week and this is likely to have a major effect of Sterling moving forward. The pound has rallied by 2.3% over the past month from low to high and this should have a dampening effect on producer prices but will take a few months to feed through into CPI. However, analysts expect another rise in core inflation from 3.1% in November to 3.2% in December.
Euro continues to rally in rate hopes
Any further discussion of a tapering particularly involving ECB President Mario Draghi will mark a significant departure for the Central Bank and see the rally prolonged. The next major point of resistance for the Euro is at 1.2520 a level not seen since late 2014.
Inflation data for Germany will be released tomorrow, followed by Pan-Eurozone data on Wednesday. Germany is expected to see an unchanged rate of 1.6% while for the entire region it is expected to have risen from 1.1% to 1.2%. This is still significantly lower than the ECB’s 2% target but there is concern that it will accelerate later in the year as the rate of growth picks up.
Dollar index at fresh lows
The dollar itself is also facing the reality of a lowering of rate hike expectations. Inflation data released on Friday showed that while core inflation rose from 1.7% to 1.8%, it remains shy of the Fed’s target. Retail sales data for December was expected to rally but was unchanged both month on month and year on year. The effect of the December rate hike has yet to be seen which could slow consumer activity in January which is, anyway, seen as a “slow month”.
There is little in the way of significant data being released in the U.S. this week, so the dollar is likely to be reactive to news from Europe and the UK, with inflation the prime focus on both sides of the English Channel.
This week’s events of note
The first full week of the year, Politics could overshadow Data
- U.S. : Holiday – Martin Luther King Day
- UK: Inflation Report – Expectation is for an increase to 3.2% which could be good for Sterling if not the consumer
- UK: Producer Prices – Expected to have fallen to 6% from 7.3% in November
- Eurozone: Inflation – Region wide inflation likely to stay below 1.5% YoY despite pockets of higher prices in Germany and France
- Canada: Rate Decision – A hike is expected.
- China: GDP – A bell whether for global growth. a rise to 7% YoY possible
- UK: Retail Sales – The important Christmas data. The individual stores reports have been mixed
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.”