Daily Market Brief 23 February 2018

Brexit concerns halt Sterling rise.

February 23rd: Highlights

  • Brussels rails against “cherry picking”
  • Euro strength a worry for ECB
  • Dollar rally runs out of steam

Brexit issues return to drive pound

It has been a constant theme of the whole Brexit process that while negotiations continue in the background, traders are prepared to ignore the ramifications of the UK leaving the EU. They concentrate on other drivers primarily monetary policy. However, as soon as Brexit returns to the headlines, it is universally negative for Sterling.

So it proved again yesterday as the EU said it would not agree to a transition period where the UK complied with some EU rules, diverges marginally from some and totally disregards others. It is unrealistic from both sides; the UK wants to transition to a complete break and it makes sense that during that period, certain divergences will take place. However, since Brussels sees itself in a position of strength it feels it can present an all or nothing scenario. It remains to be seen how this will play out, but experience shows that London is likely to “blink first”.

The pound has stopped short of the 1.4000 level versus the dollar making a high of 1.3989 yesterday before falling back a little to close at 1.3948. It has fallen a little further in light trade overnight, so far reaching 1.3939.

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ECB concerned about Euro strength.

The relative strength of a currency is not an easy concept to quantify. The single currency, having fallen close to 300 pips from its recent high could easily be construed as being weak but the trend continues to concern the ECB particularly since it has moved so consistently in a single direction for more than a year.

ECB Council member Belgian Jan Smets took up the reins from Mario Draghi to express his concerns over the currency saying it is a point of attention for the Central Bank. He went on to say that he was concerned about volatility in the FX market which magnifies moves and creates overshoots. “Currency strength should be dictated by economic fundamentals and not from a deliberate devaluation policy elsewhere”, Mr Smets said.

Smets comments came as the Euro finally found some support around 1.2280 which had been resistance during its recent rally. It also made ground versus a weakening pound reaching 1.1283 but has fallen back a little overnight moving back above 1.1300, the pound making a high of 1.1343.

Smets final concern over currency strength was its effect on the ECB’s inflation target. Core inflation has remained around 1.3% across the entire region in recent months and this is not helped by currency strength which lowers the cost of imports.

Dollar bounces off technical resistance.

The dollar index reached a high of 90.24 yesterday before falling back as short-term traders took profit on long positions.

This week has been mixed at best for currency markets with contrasting factors and drivers bringing uncertainty and more than a little short-term volatility. The main resistance level for the dollar index is at 90.50 but that appears well protected for now and coincides with the support for the Euro at 1.2280.

The wait for confirmation of the Fed’s monetary policy outlook will have to wait an extra week as the U.S. employment report is not due for release until March 8th. All eyes will be on the hourly earnings data to see if January’s figure was an anomaly.

The most notable data releases next week are inflation in Germany then the entire Eurozone on Tuesday and Wednesday and preliminary Q4 GDP data in the U.S. As already mentioned Eurozone inflation is expected to be 1.3% while the U.S. GDP is expected to be slightly stronger than previous releases as earnings data is added in.

Fed Chairman Jerome Powell will make his first monetary policy speech since taking over, also on Wednesday. Analysts will be interested in the tone as much as the substance of what he says.

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.”