Daily Market Brief 22 December 2017

Political Events Provide Impetus

December 22th: Highlights

  • Green, Jerusalem and Catalonia have varying effect on currencies
  • UK consumer concerns hit sentiment
  • Opposing data releases leave dollar higher

May facing questions over Green allegations

Political events tend to have a variable effect on currency movements, often supporting an underlying trend but occasionally providing impetus that conflicts with economic data.

This week the dollar, pound and euro have each seen a political development that has shaped traders, at least those still at their desks, short term view.

First, the vote at the UN on President Trump’s recognition of Jerusalem as the capital of Israel has had limited effect on the dollar although it will add to the catalogue of controversial decisions that have formed a significant part of his first year in office.

Next, Theresa May is facing questions over her knowledge of events surrounding her former deputy, Damian Green, who was effectively removed from office this week. There are questions, formally denied by Downing Street regarding her knowledge of allegations of impropriety by Green in 2016. Sterling faced some pressure as this mixed into a pot of negatives for the currency which is obviously dominated by Brexit

Finally, the regional election in Catalonia was held, and the result has been as indecisive as the Spanish Government in dealing with the crisis. The party wanting to remain an autonomous region of Spain are the largest single party in the new assembly by separatist parties hold most seats. The single currency fell as the ramifications were felt all the way back to Brussels.

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Consumer finally abandoning support for UK economy

Over the entirety of what has been a challenging year, to say the least, for the UK economy the consumer has steadfastly remained a positive influence. This support may finally be fading, possibly in the face of higher borrowing costs, after a fall to a four year low in consumer sentiment following data which was released yesterday.

Banks have become more selective in the decision-making processes as the economy has begun to slow. Higher interest rates, lower multiples and higher deposit requirement have hit those individuals looking to buy property. This has the knock-on effect of slowing house price growth which leaves homeowners concerned over the future value of their property.
Sterling ended the day unchanged versus the dollar for the second session in succession and has been in a narrow range overnight. It reached a high of 1.3385 but any interest quickly petered out. Versus the Euro it gained on the back of the Catalonia decision, although the upside for the pound is clearly limited. Given next week’s shortened week we are close to the year-end levels for currencies unless there is a black swan event lurking to strike during the holiday driven trade.

Dollar arrests slide as Euro falls

The dollar index had closed lower every day this week until the news of the result of the vote in Spain drove the single currency lower. The Euro makes up 57.6 of the dollar index. The dollar also reacted to contrasting macroeconomic data releases.

The “final cut” of Q3 GDP data confirmed that the economy grew at 3.2% from July to September, slightly lower than the last estimate but still a strong showing in global terms, which should lead to higher inflation which will in turn drive the FOMC to consider raising rates. However, data for weekly jobless claims increased which may pressure the non-farm payrolls data that will be released at the end of the first week of the New Year.

The dollar has fallen by close to 10% from high to low over the course of the year despite three rate hikes in twelve months. The lack of an economic stimulus package, which was promised by President Trump during his election campaign and the tortuous progress of fiscal reform legislation have offset the benefit of the widening of interest rate differentials. The outlook for the dollar in 2018 remains mixed as the President is sure to exert major influence but it is how Jerome Powell performs as the new Fed. Chair that is driving the most interest.

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.”