Platitudes hide real Brexit story
Morning mid-market rates – The majors
February 19th: Highlights
- Sterling climbs versus Euro as May meets Merkel
- Mixed messages as dollar rallies
- Euro sees strong selling interest above 1.2520
Brexit deadlock to bring tough negotiations
As happened last year during stage one of the negotiations, the pound has rallied during periods when there were no official comments only to fall when hopes were dashed primarily due to the unbending attitude of Brussels.
The most recent official comment has been Michel Barnier’s view that a transition period “isn’t a given” and there has been nothing since to change that notion.
However, the irrational optimism remains driving the pound higher versus the single currency although it did lose ground versus a recovering dollar. It reached a high of 1.1299 on Friday and has remained close to that level overnight. Versus the dollar the pound made a high of 1.4146 early on Friday morning before drifting back to close at 1.4011. Overnight it has tried to rally again reaching 1.4050 but has run into further selling pressure.
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Dollar rally could be short-lived.
The dollar index seems to be building a base close to multi year lows at 88.50 but it is running into difficulty breaking back above the 89.20 level that previously provided support. A weaker dollar will “level the playing field” somewhat after years of a strong dollar providing an advantage to America’s trading partners but too much weakness will discourage purchases of Government debt pushing rates higher.
The possible narrowing of the interest rate differential is particularly prevalent versus the Euro where the ECB will come under growing pressure to normalize rates as the Eurozone economy improves and growth becomes more stable.
The move lower in the dollar over the past few weeks has driven a round of “bargain-hunting” amongst traders and although the factors pushing the dollar lower haven’t gone away, a period of reflection could follow this week.
Euro sellers emerge above 1.2520.
The Italian election campaign is heading into its final lap with the centre-right coalition still leading in opinion polls. The possible fallout from this has so far been ignored by the market but as March 4 approaches, there is likely to be some nervousness around the currency.
This week sees the release of purchasing managers indexes of activity in the Eurozone together with growth data for Germany. Both are likely to be positive for the currency so a further test of the selling above 1.2520 is possible. A survey of economic sentiment for the entire region will be released tomorrow which is likely to provide direction to the Euro in the first part of the week.
This week’s events of note
- U.S.: Presidents Day – Partial closure of U.S. Markets
- Asia: Chinese New Year – Markets to be disrupted all week.
- Eurozone: Bundesbank Monthly Report – Closely observed for changes in language over inflation concerns. Last week’s unchanged 1.4% read may loosen calls for withdrawal of accommodation.
- Australia: RBA Minutes – Calls for rate hike subsiding. Main interest will be how RBA sees trade with China expanding
- Eurozone: Consumer Confidence – A marginal fall within acceptable margins expected. The consumer has less effect on the Eurozone economy than in UK of U.S.
- UK: Retail Sales – A further fall likely as interest rate increases both past and future cause concern to consumers
- UK: CBI Industrial Trends Survey – A fall from last months 14 likely as concerns over Brexit hit investment
- Eurozone: Non-Monetary Policy meeting – The strength of the euro sure to be a “hot topic” but no rate decision or press conference at this meeting
- Eurozone: Manufacturing and services activity indexes – Slight falls expected after Decembers extremely strong reports.
- UK: Employment report – Little change in claimant count of employment rate expected. All eyes will be on wage growth following MPC Comments.
- U.S. : FOMC Minutes – Minutes from Janet Yellen’s last meeting and her handover to Jerome Powell. A lot of water has flowed under the bridge since then so these minutes hold little significance.
- UK: Q4 GDP – A paltry 0.5% QoQ expected. Unchanged from previous estimate but still weak in global terms
- Eurozone: ECB Minutes – A view of what Council members are thinking regarding withdrawal of stimulus so avoided b y Sr. Draghi
- Eurozone: Inflation – Following Germany’s 1.4% a read of close to 1% is expected. This will please the ECB and allow then to avoid tightening.
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.”