Daily Market Brief 22 May 2017

Sterling Struggling to Make Further Progress

May 22nd: Highlights

  • Brexit concerns persist
  • Election rally lacking follow through
  • Dollar weaker as rate hike in question

Landslide Election Victory predicted but “what then”?

The pound has gained 3% over a stricken dollar since the General Election was announced. With little “new news” to provide impetus there is a danger that once the election is over Sterling will suffer as Brexit fears return.

Historically it is never seen as a benefit to the country or its economy for there to be virtually no opposition. The Labour party were routed during the “Thatcher years” and the Conservatives suffered a similar fate when Blair was in power. A large majority provides, not stability, but a mandate for the ruling party to act in an unfettered manner. This election is unique as it is being seen as a vote concerning which party is best equipped to handle Brexit negotiations.

After the euphoria of the election announcement most of the gains for the pound have been attributed to weakness in the dollar. A realistic target for this rally is 1.3440 last seen in July of 2016 but a lack of fresh buying interest could see a correction before that point is reached.

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Euro showing strength as fears evaporate

Since the rise to 0.8312 following the election announcement the pound fallen gradually but significantly against the Euro. Overnight it fell through the 0.8600 level that had been strong support. The next target is 0.8665 the high from March 30th.

Momentum is a significant force in the foreign exchange market. There is no doubt that it is the Euro that has momentum right now. The break of 1.1000 against the dollar has turned consolidative on the approach to resistance at 1.1220 but any correction should be shallow.

On its previous rise to this level in August last year, the single currency spent several days bouncing between 1.1150 and 1.1280 before succumbing to a stronger dollar and starting the fall that reached 1.0400 in January.

This rally looks more solid, without the political fears that were holding investors back. The French election has driven those fears away and while economically the region still faces issues, the EU as a concept remains intact.

Trump struggling to appear statesmanlike

President Trump chose Saudi Arabia as the destination for his first overseas visit. He was guaranteed a warm welcome since it is thirty-one degrees in Riyadh! The signing of an arms deal worth $110bn will have appealed to his business background but it is his ability to listen that was most tested.

Back home, the furore over his sacking of FBI Director James Comey continues unabated. The overspill from the political arena into the economy is driving the dollar lower. Not only is it making fresh lows against the pound and Euro, the Yen and Swiss Franc are also on the move higher.

So far, the 110 and 0.9725 levels have held firm but as hopes for a June rate hike fade the dollar will struggle to find buyers.

The fallout from the whole Trump/Russia situation has started to call into question the President’s ability of drive his reform agenda through. He is in danger of falling between two stools. Unable to be the “America First” President he set out to be nor able to influence overseas developments to America’s benefit.

North Korea taking full advantage

North Korea launched a further missile test over the weekend and is getting ever closer to having the ability to deliver a nuclear payload to the U.S. mainland. This is a situation that will need to be dealt with sooner rather than later but the U.S. will need to tread carefully and ensure that Beijing is fully appraised and onside with any course of action decided upon.

North Korean Leader Kim Jong Un is a master of using every advantage he has at his disposal and he will be well aware of President Trump’s current weakness at home.

Any escalation of tensions or indeed any tangible action will see buying of the safe haven Yen and Swiss Franc as global risk aversion returns.

This week’s events of note

The weekend press will be dominated by Political shenanigans in Washington as President Trump tries to extricate himself from his Russian mess. The Eurozone has shrugged off the political yoke and economics are driving the Euro. In the U.K. Mark Carney got some good news in the shape of retail sales as he prepares to face the Treasury Select Committee.

  • A quiet start to the week datawise – Any further revelations about President Trump will herald some activity, otherwise a reflective start following new multi-month highs for Sterling and the Euro.

  • Germany: GDP – The Eurozone powerhouse expected to grow at 1.7% year on year.
  • Eurozone: Economic activity indexes – Economic activity indexes: A likely continuation of expanded activity as growth returns to the region.
  • U.K.: Parliamentary inflation hearings – A grilling for Carney from officials determined to score points.
  • U.S.: Economic activity indexes – Some improvement in activity but politics taking a rate hike off the table for now.

  • Canada: BoC Rate announcement – No change likely.
  • U.S.: FOMC Minutes – The game has changed somewhat since the meeting so the minutes will be out of date. Still some interest in how close economically a June rate hike was.

  • Dollar: OPEC meeting – With a falling oil price output cuts may be agreed but only Saudi Arabia and Russia are in agreement. The dollar will be under further pressure if there is no agreement.
  • U.K.: GDP (Prelim) – A further adjustment, but little material change from the previous 0.3% QoQ expected.

  • U.S.: Durable goods orders – A notoriously volatile number. The ex-transportation release holds most interest as it excludes “big Ticket” items like Planes, Trains and Ships.

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.”