20 Feb 2019: Sterling at its highest level in two weeks

Sterling at its highest level in two weeks

February 20th: Highlights

  • Brexit optimism and strong data push pound above 1.3000
  • Dollar weaker as Fed minutes loom
  • Mixed data leaves euro under pressure

Hope that Prime Minister could reach a deal with Brussels

The UK Prime Minister has been in intense negotiations with Brussels over the past few days raising hopes that EU officials have softened their stance over the Withdrawal Agreement and may be willing to look at fresh proposals. The major stumbling blocks of Brussels insistence that the negotiations are over coupled with the assertion that they are unable to ascertain just what the UK is looking for may have been put aside as pressure from individual members is being applied to the negotiators.

The reality of a no deal Brexit will be felt on both sides of the English Channel as supply chains within the EU will be disrupted and major firms in the UK are starting to “vote with their feet” and setting up operations outside the UK.

Coupled with this renewed optimism was a strong set of employment figures which showed that the UK has its highest number of workers in jobs ever. This, of course, should be tempered by the fact that the population is also at its highest ever.

The unemployment rate remained at 4% but wage inflation continues to grow, reaching 3.4% in January.

The pound rallied to a high of 1.3074 versus a weakening dollar but also made fresh recent highs of 1.1533 versus the single currency.

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Concerns over dovish Fed push dollar lower

The imminent release of the minutes of the latest meeting of the FOMC is driving concern that individual members of the committee may be feeling more dovish about the need for future rate raises that had been intimated by Chairman Jerome Powell. There have been calls for a slowing of the reduction of the Fed’s Balance Sheet to ensure that a certain amount of accommodation remains in place.

A fresh round of talks between U.S. and Chinese trade delegates also appear to be making headway which has encouraged global risk appetite to improve although the IMF, in a statement, remains concerned about the pace of global growth.

Market perceptions are turning towards a more dovish Fed going forward while long term bond yields are falling which is putting more pressure on the greenback.

Since the most recent Fed meeting, the data releases have been mixed and it is thought that FOMC members, having had advance detail on the data will have been more dovish in their outlook.

Following the release of Fed minutes later this evening, there will be various indexes of activity released which will be keenly observed for signs of a slowdown.

The dollar index fell to a low of 96.42, closing at 96.52 and has remained weak in Asia overnight.

Euro remains under pressure despite rally versus a weaker dollar

The euro fell, as mentioned above, versus a stronger pound yesterday but managed to gain ground versus the dollar which now appears to be receiving the brunt of market concerns.

While the U.S. economy is slowing there is no question of a recession as is likely in the Eurozone, and as such, any rallies for the euro will be short-lived.

Yesterday, it rallied to a high of 1.1358 versus the dollar closing at 1.1343. There is already selling interest starting to build slightly above the current level as pessimism over the remaining data releases this week remains.

Yesterday’s release of the ZEW index showed a mixed view of activity in Germany. It was lower than in the previous month but not by as much as had been feared. This could mean that Germany manages to avoid a technical recession this year but it will not see significant growth until its neighbours and partner’s economies start to improve.

All eyes will be on the ECB meeting which takes place in two weeks and until then the euro will be in reactive mode, mirroring the dollar and taking note of data releases.

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.”