May Facing Difficult Task
December 19th: Highlights
- Trade demands coming from all sides
- Sterling ranges narrow as year-end approaches
- Dollar mired in recent ranges as tax reform benefits questioned
Fail to prepare, prepare to fail!
When talks started last March, the U.K. negotiating team could be forgiven for a lack of preparedness as they had no real forewarning of what the EU were going to demand. As stage two talks commence, no such excuse will be acceptable to either Parliament or the public. Theresa May has an opportunity to formulate and execute her plans for both the trade deal and the length of, and what is included in, the transition period.
Consultation with interested parties like the Confederation of British Industry will be vital to ensure that business needs are satisfied. Most of all clarity will be demanded in order that businesses can plan with some certainty for the future and return to investment in their operations the lack of which has led to virtual economic stagnation.
Sterling ranges to narrow
Against a dollar which is still driven by tax reform, the pound recovered approximately half of its fall on Friday reaching a high of 1.3419 before dropping back to close at 1.3383. Overnight it has barely moved and is virtually unchanged from the U.S. close.
Versus the Euro, the pound struggled to recover Fridays losses making a day’s high of 1.1372 before closing a shade lower at 1.1360. The single currency has had no new influences recently, but political concerns continue to rise which could come to head in the New Year.
The outlook for Sterling is inextricably linked to Brexit but it is the wider ramifications that will be more important as we head into the New Year. The economy is slowing with inflation still a major issue. The “smokescreen” created by the MPC from behind which they blame the fall in Sterling since the Brexit referendum for price increases is starting to fade. They make no mention of the boost that should have been seen in exports from such a fall in the value of the pound. Business investment continues to plummet, and FD’s and CFO’s will be expecting clarity on the economy and Brexit to allow them to plan with a measure of certainty going forward.
Dollar caught up in Tax Reform
The inability of administrators to agree on the package of tax reforms has been one driver of the dollar while the future path of inflation and interest rates has been another. In normal fashion when viewed from the outside, a degree of brinkmanship will develop before the tax reform bill will pass into law.
The change in Chairman and therefore emphasis by the Federal Reserve will have a more lasting effect. The fact that Janet Yellen only served one term shouldn’t cloud the fact that the vast majority of Chairmen serve at least two and often three terms in office. That means that when Jerome Powell takes over in February the markets can reasonably expect that he will be in office until 2026. This makes his initial impression doubly important, setting the tone for years to come.
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.”