Sterling facing increased turmoil
Morning mid-market rates – The majors
August 20th: Highlights
- Government to produce no-deal advisory
- Dollar stuck between trade and political issues
- Euro climbing versus dollar and Sterling
Economy holding up well, but no-deal fears dominate
The entirely spurious claim that employment is at its highest level in forty years is a comparison of apples and oranges since, for example, the number of young unemployed who are in training isn’t taken into consideration. Inflation rose for the first time since last November but given the “Brexit headwind”, the Bank of England is unlikely to hike again this year.
Retail sales were the star performer, rising by 3.5% year on year, up from 2.9% in June.
The Government will start to issue advisory guidance this week on the possible fallout from a no-deal Brexit. While negotiations continue, or at least restart soon, this appears to be a little premature and betrays the muddled thinking that currently pervades the government. While the time for “sabre rattling” has long since passed, such gestures are little more, since that is the least likely outcome due to the fact that it favours neither party, no matter what hard-line Brexiteers may say.
On Friday, the pound rallied a little versus a weaker dollar reaching 1.2754 and closing close to that level. A slow start to the week in Asia has seen the pound retain those gains. The euro rose against Sterling on Friday reaching 1.1139 and closing at 1.1148.
As we enter the final week of the “vacation period” with Labor Day in the U.S and the late summer holiday in the UK next week, market liquidity may be low as we await the return of several factors that will form the prelude to what is likely to be a volatile six-month period up until the official Brexit date on March 29th.
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Trump driven dollar lacking direction
Clearly there was going to be a tipping point in the dollar’s rally, but the catalyst has been the concern that when faced with foes he cannot easily cow into submission, President Trump lacks the diplomatic tools to negotiate.
The reaction of the dollar to geopolitical events is something that Trump is yet to come to terms with, as he displays a belief that the dollar’s only driver is trade imbalances.
The rally in the dollar over the second quarter and so far in the third has been in reaction to a widening of interest rate differentials, but as the one-offs that have contributed to Q2 growth fade, the Fed may place itself on hold through the winter, dependent upon how much lower Q3 GDP is than Q2.
On Friday, the dollar’s correction continued with the index falling to a low of 96.09 and the Euro rallying to 1.1445.
Euro on a long slow recovery
Following the bridge collapse in Genoa last week, a turnaround is likely from the Italian Government, who had been considering withdrawing funds from infrastructure works to fund social reform. Were they to be faced with additional budget contributions, the nationalist Government could face renewed calls for a review of its membership of the euro and possibly even the EU.
Similar issues could face France which has undertaken a review of several public works projects and found them to be in a state of decay.
Given the continuing interest rate differential between the dollar and euro, the size of which is likely to widen only very slowly but will not narrow for more than a year, it is an easy case to make for the euro to continue towards its long-term goal of 1.1000. However, as the U.S economy starts to slow through this quarter and the next, and the Eurozone continues to grow at close to trend a long slow recovery targeting 1.2000 could begin.
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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.”