17 February 2020: Sterling retains gains

Sterling retains gains

17th February: Highlights

  • Sterling maintains positivity
  • Dollar continues upwards path
  • Euro hangs on as growth concerns weigh

Change of Chancellor is seen as positive for growth

The pound bounced back last week from a bout of weakness brought on by concerns about the economy and continuing fears over the type of trade deal the UK can expect to agree with the EU.

The subject of trade has also been raised in a row that is brewing between the UK and Australia. It seems that any trade deal is in jeopardy because the Australian Government is disappointed about the UK’s use of Huawei as a possible partner in the development of the UK’s 5G network.

Both Australia and New Zealand have followed the U.S. lead and confirmed that they will not cooperate with Beijing due to security concerns.

China has also made a seemingly unsolicited offer to build the UK’s high-speed rail link in five years at a fraction of the cost.

Despite Boris Johnsons strong words over what the EU expects from a trade deal it is obvious that negotiations, not just with Brussels but with other significant trading partners will not be as clear cut as Johnson made out in the election campaign.

In terms of trade, the country seems to have reached something of a hiatus with everyone looking at each other to start the long-awaited process, and, indeed, to decide who will be involved from the UK side.

There are also rumours that the Budget which was due on March 11th will be postponed following the resignation of Sajid Javid as Chancellor. While it is traditional for the Budget to be the Chancellor’s own work, the fact that Johnson and his advisors will be involved means it may be delayed.

Last week, the pound regained the 1.30 level versus the dollar and climbed to a high of 1.3069, closing at 1.3048

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Risk appetite improves as Virus appears more controlled

There remains a minor degree of concern about the medium-term prospects for the U.S. economy, partly due to the uncertainty created by President Trump’s plans to give a boost to the economy (possibly by even more public spending) pre-election..

Although Bernie Sanders is the current favourite to contest the Presidential Election versus Donald Trump, former New York Mayor and billionaire Michael Bloomberg is the most likely Democrat Candidate.

Bloomberg would meet Trump on Trump’s terms. He is as successful a businessman, possibly even matching Trump’s charisma.

He would not be cowed at all by Trump, would ask the important questions and would challenge the answers using experience, drive and a political background.

Trump will be concerned about facing Bloomberg, particularly face to face in the Presidential debates.

This week sees the release of the minutes of the latest FOMC meeting.

While labelled a snoozefest at the time, not only was it far more interesting than expected, thanks to the comments of Chairman Powell, but also the data which has been released subsequently. The employment report was generally stronger than expected but with inflation picking up as well, the direction of the next move in short-term interest rates remains a mystery although, on balance, a hike is just about favourite. Were the Fed to hike rates; any move in rates is unusual in an election year, the President would probably blow a gasket.

There is no secret to his desire for lower rates, even if his economic reasoning is a little shaky.

Because I want lower rates is not a reason!

Last week, the dollar index continued its confident march towards the 100 level. While such a move cannot be ruled out it may be caused by weakness in the Eurozone rather than anything specific from the U.S.

The index reached a high of 99.16 last week, and closed at 99.12.

Confidence and Activity data set to drive euro direction

This week, there is a raft of data being released which is both retrospective and forward looking.

We have had several false dawns, not only with green shoots expected and some actually seen, but also, expectations of some action from the Central Bank.

The data has been disappointing, and all the ECB has come up with is a strategic review of tools that have already been used.

Is it any wonder that the markets are beginning to look at parity between the dollar and the single currency? This would also mean a 100 read for the dollar index, which would certainly create the conditions for the aforementioned blown gasket but would lead to accusations of currency manipulation.

Q4 GDP data was released last week and the kindest thing that can be said (apart from ignoring it completely) is that at least the economy didn’t contract.

It seems that the Eurozone, must destroy its own economy if it is to escape a charge of currency manipulation..

Can’t the U.S. Treasury simply agree that the whole experiment was doomed to fail once they found that there was no fiscal union to go with monetary union, and leave them alone?

This week, data for consumer confidence, services, manufacturing and composite output, as well as the influential ZEW survey of investor confidence will be released.

Inflation data will also be released and is expected to remain at 1.1 YoY. This is the number that must haunt former ECB President Mario Draghi since he linked any economic upturn to a rising trend in inflation.

The week the euro fell to a low of 1.0827, and closed at its lowest level since April 2017, at 1.0837

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.”