Bullish View of Economy Drives Sterling Higher
January 19th: Highlights
- Sterling fall since referendum being slowly eroded
- Euro resumes rally as interest rate differential set to narrow
- Dollar suffers as Government shutdown looms
MPC member sees lower unemployment and higher wages
Without any tangible evidence to back his view, he has predicted that unemployment, already at record lows, is going to fall further and wages are going to start to rise. His bullish view on the UK economy is starting to be shared by analysts who believe that once a transition deal is agreed between the UK and EU, the concern of a hard Brexit with a concrete deadline of March 29 next year disappears.
Sterling reached a high of 1.3914 yesterday and has made a fresh high of 1.3925 overnight (6.15am). It remains firm against the single currency, holding on to recent gains and making a fresh one month high of 1.1361. It has corrected a little overnight but remains comfortably above 1.1300.
Today sees the release of retail sales data for December. If the consumer has resumed support for the economy, the pound could test the 1.4000 level and, possibly, strong resistance at 1.4030.
Market exuberance spills over into Euro
While traders are prepared to take at face value the prospect of the tapering of the Asset Purchase Scheme commencing as soon as March’s ECB meeting, next week’s meeting is a little too soon to have any bearing on monetary policy.
Economic data for the entire region is still being considered in a pioneering manner since the currency is still less than twenty years old. There is no precedent for the effect of the variety of different economic and fiscal policies that are brought together under a single currency.
Sentiment indexes are particularly hard to predict since their constituent drivers can vary greatly.
For example, were Germany to still be “independent”, their economy would be powering ahead, the consumer would be more confident, and interest rates would be rising. Greece on the other hand is still teetering on the edge of another recession, expected to try to grow out of the ruins of the debt crisis without having had the “benefit” of a devaluation. Indeed, it is unprecedented for such an economy to have had its currency appreciate by more than 20% in a year. That illustrates perfectly the dichotomy facing the ECB.
Threat of Government shutdown pushes dollar lower
It is an opportunity for Senators and Congressmen to promote their own agendas by holding back their support. It is glib to say that it is always resolved in the nick of time like the plot of some disaster movie as this year there is an added ingredient; President Donald Trump.
Trump has weighed into the argument stating that he wants an extension of funding for the Children’s Health Insurance Program (CHIP), a Democratic priority, to be excluded. An emergency funding agreement was passed to allow the Government to continue to operate until the deadline of February 16th. This is most likely another “non-story”, but until a solution is found, the threat remains of a complete shutdown of the entire Federal Government.
The dollar index fell yesterday reaching a low of 90.41 as it gave back all the gains made on Wednesday. With no fresh data due today the index is likely to finish the week on a low since negative sentiment is set to prevail.
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.”