Daily Market Brief 16 January 2018

Sterling Surge Continues

January 16th: Highlights

  • Makes fresh post-referendum high
  • Euro pauses but remains close to highs
  • Dollar index at lowest level since Jan ‘15

Brexit hopes drive Sterling above 1.3800

The pound continued its New Year rally yesterday making another fresh post-referendum high. It briefly traded at 1.3820 before falling back to close a touch below 1.3800. Overnight it has retraced a little further making a low of 1.3782.

The reason for Sterling’s continued strength is optimism over a more beneficial Brexit deal being negotiated than had at first been feared. Sterling is surrounded by a lot of rumour and innuendo now,with a story of support from Spain and the Netherlands for a deal which keeps the UK close to the EU being denied but still having a positive effect. This means that until there is either some positivity created by macroeconomic data or an EU member publicly declares support for a positive Brexit deal, the strength of Sterling is “built on sand”

Reality returns today with the release of inflation data for the UK in December. It is hard to say what is a good number and what is bad as far as the pound is concerned. Analysts expectation is for a rise from 3.1% to 3.2%. Dependent upon what happens with wage inflation when the employment report is issued next week, that could be positive for the pound since continued higher inflation could mean the Bank of England may have to act again sooner than expected.

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Euro pauses but retains momentum

The recent rise in the value of the Euro against, in particular the dollar looks a little more sustainable than that of the pound. There is “significant” discussion taking place over the tapering of the ECB’s Asset Purchase Scheme as a prelude to higher monetary policy as the economy starts to grow.

ECB President Mario Draghi apparently retains his concerns about the ability of the Eurozone to grow “unaided”. The next ECB policy meeting will be significant, not for any movement in rates, but for the comments and answers to reporters’ questions Sr. Draghi will provide following the meeting. The next meeting will take place a week tomorrow. In the meantime, the single currency made a high yesterday of 1.2297 then fell back a little to close at 1.2269. It has fallen a little overnight as profits are taken on “weak” speculative long positions.

The ability of the Euro to hang on to its recent gains will be tested by today’s release of inflation in Germany, with an unchanged read of 1.6% expected, followed by tomorrows pan-Eurozone inflation report. Inflation is starting to pick up but only very slowly and despite German calls for the ECB to “get itself ahead of the curve”, Sr. Draghi and his colleagues prefer a more reactive stance.

Dollar continues to struggle

It is difficult to attach a single reason to the fall in the dollar so far in 2018. It has reached its lowest level in three years as the dollar index plumbs the depths of the 90’s. It fell to a fresh multi-year low of 90.28 yesterday. The prospect for an interest rate hike, the first of three that are predicted for 2018, has barely changed, the U.S. economy has not received a significant blow and macroeconomic data has been sufficient for analysts to believe that growth is on course to reach 3.5% in Q1.

Despite this and although both the Euro and Sterling rallying driven by their own factors, the reason for the dollar’s fall can be attributed to the recent performance of the President who continues to alienate America’s allies and neighbours in continued displays of arrogance, petulance and disregard for the place of the U.S. in the global economy.

Should the dollar’s weakness continue, it will soon feed through into producer prices and eventually into CPI. This will provide a further encouragement to the FOMC to hike rates which should see the dollar start to recover. There is no significant data to be released this week, so the dollar will continue to be affected by the performance of its trading partners currencies.

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.”