Daily Market Brief 17 April 2018

Pound closes in on Post-Referendum High

April 17th: Highlights

  • Monetary policy expectation drives fresh buying
  • Trump threatens manipulation charges
  • Political unrest threatens euro.

Rate Hike expectations continue to rise

The FX market has now managed to convince itself that the Bank of England will hike interest rates at its meeting on 10th May despite no fresh evidence over that past week or so that conditions are favourable.

Today’s employment report may give more tangible encouragement if the rise in the pace of wage increases seen last month is replicated. The interest rate futures markets are now discounting as certain next month’s hike having fallen recently. Last week’s data releases were almost uniformly poor but that has not discouraged traders who see the Bank of England as determined to “stay on top” of inflation, something they were patently unable or unwilling to do over that past year or so.

Wage increases are expected to have grown at around 2.9% in March adding to inflationary pressures down the road. From figuratively wringing its collective hands at being powerless to stop inflation rising in the face of a falling pound, the MPC has now decided that, as inflation starts to fall, it is in a better position to ensure it comes back into line. It seems that the damage may have already been done by months of negative income growth despite which the consumer has held up well in its support of the UK economy.

The pound reached a high of 1.4345 yesterday and has maintained that strength overnight as markets anticipate supportive data today and tomorrow.

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Trump hijacks currency manipulation bandwagon.

A year ago, at this time President Trump, to almost universal ridicule threatened to label Germany a currency manipulator since it was benefitting from what he called an artificially weak currency. It was true that the single currency was weak, and Germany was benefitting but given the economic turmoil that Europe had suffered it was a stretch to call any weakness artificial.

Now a year on, the Eurozone economy continues to grow despite the overhang of debt still causing concern in several quarters and Germany continues to perform on trend. President Trump however has trained his currency manipulation sights on what he considers to be the serial manipulators of China and Japan. Japanese economic policy, nicknamed “Abenomics” after the Prime Minister is designed to both create a weakening currency and benefit from it. China’s currency is not yet totally free from state interference, but it is unclear what the U.S. can do or is willing to undertake. The annual review undertaken by the U.S. Treasury of global trade can label a country a currency manipulator whereupon certain tariffs and sanctions can be introduced as “punishment.

The dollar index is still reacting to the recent events around the Syrian intervention and trade has, for now, taken a backseat. It fell back a little yesterday making a low of 89.39 but remains in a narrowing range.

German labour unrest could herald wider issues.

The threat of strikes and labour unrest is almost unheard of in Germany. German workers are envied throughout Europe for their hard work, talent and engineering prowess that has seen them well rewarded for ensuring Germany remains the envy of the industrialized world.

However, years of lower wage increases, scandals like the VW emissions fraud and import of low paid unskilled workers have taken a toll and now Germany is suffering from the threat of strikes as, unions keen to protect their members rights back demands for 6% pay increases with threat of strike action.

There was also unrest in several eastern states over the weekend particularly Hungary following recent election results. Hungary’s Prime Minister Viktor Orban has been accused of creating an unfair electoral system that guaranteed him victory.

Emmanuel Macron the French President is facing a backlash over his lack of consultation with Parliament over the Syrian airstrikes. Theresa May faced a similar grilling in the UK. The euro remains in its recent range as liquidity continues to be sufficient to deal with any upheaval. It reached a high of 1.2395 yesterday but is not really threatening to test the year’s high of 1.2556 and it is acting in a reactive mode to the strength or otherwise of the dollar.

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.”