Daily Market Brief 21 June 2018

Sterling gets no relief from Brexit vote

June 21st: Highlights

  • May wins vote, promises smooth Brexit
  • Powell reiterates call for gradual rate hikes in U.S.
  • ECB unlikely to raise rates during Draghi’s tenure

Pound makes fresh 2018 low

The pound made a new low for the year of 1.3145 yesterday and has now fallen by more than 8.5% from its high of 1.4377 seen in mid-April. The fall is sure to have an effect on inflation, most likely to be seen first in a rise in producer prices.

Today’s meeting of the Bank of England’s Monetary Policy Committee will shed a little light on the Bank’s attitude to monetary policy for the rest of the year. The market sees a 40% chance of a rate hike in August and an 80% chance of a hike in December. The jury is still out on the need for any further hikes in rates given the headwinds the economy is already facing. A lot depends on how much inflation rises by over the next few months.

The Government managed to stave off a rebellion from pro-EU MPs yesterday and win the vote on Parliament’s role should there be no deal on Brexit by early next year. Prime Minister Theresa May commented that the UK’s position has been strengthened and promised a “smooth Brexit”. That, of course, remains to be seen once the Government’s proposals for the future relationship are published in the coming weeks.

Following the vote, the pound recovered a little from its low, closing the day virtually unchanged at 1.3173 although it has remained weak overnight.

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Dollar rises after Powell comments

Jerome Powell, Chairman of the Federal Reserve is growing into the job he took over last February and is now clearly in a position to “nudge” the market towards the FOMC’s goal of a steady rise in rates towards “normality”.

Yesterday he cited strong growth and a “generational” low in unemployment as reasons why interest rates should continue to rise.

The effect of the tax cuts enacted by President Trump during his first year in office are now starting to feed through into the wider economy and economic outcome of the infrastructure programme, despite putting pressure on long term yields, is also adding to growth.

With no new actions over the growing trade war between the U.S. and China, the dollar index again challenged the strong resistance at 95.25, but has still be unable to breach that level conclusively although it now only appears to be a matter of time.

While Powell’s remarks were “straight from the playbook” they were the first he has made between meetings backing what has taken place at the FOMC and as such were significant.

PMI data is due for release tomorrow and with services likely to perform better than manufacturing, this may provide a platform for further rhetoric on trade from the President.

Analysts see Q4 ‘19 as first Eurozone rate hike

For the past couple of years, there has been constant speculation over whether Mario Draghi will be the man who went through an entire eight-year tenure as ECB President without once finding it necessary to raise interest rates.

Following last week’s ECB meeting, the odds on that happening have shortened considerably since it now official that there will be no hike in 2018. Draghi’s comments that rates would be on hold until next summer, at least, were reiterated at this week’s symposium in Sintra Portugal.

Draghi’s mantra during the entire recovery of the region from the financial crisis has been that the weaker Eurozone economies remain in need of support to encourage growth and the withdrawal of the Asset Purchase Scheme by year end will provide sufficient tightening to ensure inflation remains in check

The contrast between the words of Draghi and Powell couldn’t be clearer and the continual widening of the interest rate differential between the dollar and the euro will undoubtedly set the tone for the foreseeable future with the single currency certain to remain on the backfoot.

Yesterday the euro traded in a narrow range between 1.1601 and 1.1536, closing at 1.1571. Versus Sterling it closed at 1.1379 having recovered from a fall to 1.1404 earlier in the day.

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.”