Daily Market Brief 19 March 2018

A big week for Sterling

March 19th Highlights

  • Brexit Transition deal in the balance
  • Fed likely to hike rates
  • Eurozone growth robust but no inflation spike

Pound to face multiple drivers.

The Summit of European Union Heads of Government which takes place at the end of the week is expected to decide upon the whether there will be a Brexit transition offer and if agreed what the terms will be.

There has been no tangible evidence of what kind of transition will be decided upon even if one is offered. It does appear that Brussels favours a shorter term than the UK but that could simply be a ploy to pressure London into an agreement over the terms. An end date of 31st December 2020 has been rumoured but that apart there is very little else to be expected from the deal.

It remains to be seen whether the Heads of Government will try to tie the transition deal to the overall Brexit agreement which has substantial outstanding issues still to be resolved. The issue of the Irish border remains the most contentious with Dublin insisting that it will veto any agreement which includes a closed border and the UK not standing for a border in the middle of the Irish Sea and the North remaining part of the customs union and single market.

The pound had a strong week but remains unable to break through the 1.4000 level versus the dollar, reaching 1.3996. Given that the market is now net long short term, the risk for the pound is a fall back to support situated close to 1.3780 having closed on Friday at 1.3945.

There is also inflation and employment data, as well as an MPC meeting to contend with this week, so volatility will be the name of the game!

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Powell to Chair first FOMC

Jay Powell the new Chairman of the Federal Reserve will chair his first Open Market Committee meeting this week and is likely to confound those who believed he would be anti-proactivity and more pragmatic than his predecessor.

As a lawyer. Powell is used to dealing in hard evidence and as far as the U.S. economy is concerned, such evidence, concerning inflation rising has been in short supply lately. The February employment report showed that the highly speculative headline number had rallied strongly while wage inflation fell from the previous month. Consumer price inflation remains benign and a further tightening of money supply by the reduction in the size of the Fed’s balance sheet is unlikely to drive an upwards shock.

The dollar index remains under pressure with the market concerned about the twin evils of the growing deficit and the possibility of a trade war.

Traders are starting to look at the currencies that will gain from a trade war and those that won’t. So far, the Swiss Franc and Japanese Yen look favoured since their countries have trade surpluses.

The Swiss National Bank is already considering what it can do to stop its currency from appreciating too much. They have “previous” when it comes to surprising the market as they did when the peg to the single currency was dropped a few years ago which led to mayhem.

ECB appears to be in control.

One of the more popular predictions for 2018 was for the continued appreciation of the Euro.

Having risen from a low of 1.0383 in January of last year to a high of 1.2556 in February the single currency has run out of a little steam. When you look a little deeper, it is likely that the ECB is behind the halt in the Euro’s rise.

Carefully considered soundbites from Mario Draghi and his colleagues from the Governing Council have combined with confusion over U.S. policy to halt the rally.

Despite Draghi’s words to the contrary most of the Eurozone is now experiencing sustainable growth. There are one of two pockets of concern and some worries over what could happen following Brexit.

Greece and Cyprus are growing but their public finances are still a mess.

Whilst it is unlikely that Ireland will be “hung out to dry by Brussels in Brexit talks, the ball is very much in the UK’s court and they could easily turn more hawkish, particularly since the “tail is very much wagging the dog” when it comes to the Government’s majority in Parliament

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.”