Sterling in Turmoil
September 20th: Highlights
- Higher inflation trumped by Brexit let-down
- Dollar lower as trade war effects overstated
- Euro continues to rally, threaten long-term resistance
Hard Brexit coming closer
The Irish Prime Minister commented that there has been no progress over Brexit since March which dampened the optimism that had grown over a supposed fresh proposal from Michel Barnier.
Following a dinner held in Salzburg to herald the opening of a two-day summit which had been expected to confirm the details of the Brexit agreement, the two sides seem as far apart as ever.
Earlier in the day, inflation data had been released in London which showed that prices had surprisingly increased from 2.5% in July to 2.7% in August. The main contributors were clothing and fresh foodstuffs. This was even more surprising since analysts had expected a fall to 2.4%, as the recent rate hikes start to take effect.
Sterling immediately jumped to a high of 1.3215, a level not seen since late July, on a knee-jerk reaction to the possibility of a further rate hike from the Bank of England. That optimism was seen to be unfounded and as the news of further Brexit disappointment emerged the pound drifted lower to close virtually unchanged on the day at 1.3144.
Dollar lower as trade fears overdone
Therefore, despite the threat of another round of tariffs being introduced by President Trump as soon as next week, the dollar failed to respond positively. We may now start to see the entire threat of a trade war downgraded by the markets which still have plenty to drive them as we enter the fourth quarter.
U.S interest rate futures are discounting two further hikes in short-term rates this year.
Recent criticism of the Fed. actions by President Trump appears to have fallen on deaf ears although a lot may depend on how much lower growth is in Q3 than it was in Q2. The stellar 4.2% growth seen in Q2 won’t come close to being matched by Q3 since the additional benefit of Federal spending on infrastructure and tax cuts will no longer contribute.
The dollar index fell to a low of 94.32, within touching distance of the recent eight week low of 94.30, as the trade concerns abated.
As the market’s attention turns to the relative strength of G7 economies it is likely that the dollar’s correction may be quite shallow.
Draghi calls for closer integration resisted by Germany
This is not a new debate and it is one that has been fervently resisted by Germany as it believes that closer integration could leave its taxpayers responsible for the debts of more profligate countries. This is now particularly pertinent since there are murmurs emanating from several places, Rome in particular, about significant increases in public debt.
While he has raised this topic before as the Eurozone has (mostly) emerged from the financial crisis, it could be that he dedicates his final year in office to canvassing more strongly for action. He will be supported by French President Emmanuel Macron who was elected on a platform which included closer integration in fiscal affairs.
The euro maintains its reactionary stance rising yesterday in response to a weaker dollar. It is approaching short-term resistance at 1.1720, having made a high of 1.1715 yesterday. It closed at 1.1674 and lacking any fresh factors may start to correct lower again as the dollar’s recent correction peters out.
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.”