Daily Market Brief 23 January 2018

Macron Comments Drive Sterling

January 23rd: Highlights

  • Expectation of bespoke deal push pound close to 1.4000
  • Dollar suffering despite agreement of budget
  • ECB speculation provides Euro with positive tone

Brexit hopes rise again

Emmanuel Macron, the French President, fuelled the positive sentiment that has been surrounding Sterling recently as he made “positive noises” about the prospects for the UK’s trade deal with the EU. Macron said he saw no reason why the UK should not achieve a “bespoke” trade deal. He did however sound a note of caution over the dominance of the City of London and it’s access to the EU’s financial market.

While not using the “cherry picking” term that EU officials have been favouring it is also starting to become clear that the EU is preparing to allow some concessions on trade in goods but will be tough on the trade in services. The imbalance between the UK’s exports of goods versus services means that this may become unpalatable for the UK Government.

Lord O’Neill the former Goldman Sachs chief economist turned Government Treasury Minister sounded a positive tone for the UK economy yesterday which also pushed Sterling higher. He commented it was not realized just how strong the underlying economy is and that growth in Asia, Europe and the U.S. are set to drive the economy on.

The pound closed in on the 1.4000 level versus the dollar falling just short, making a high of 1.3991. Versus the Euro, the pound showed greater strength, rallying to 1.1413.

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Dollar mired in political wrangling.

The greenback has been hit by twin headwinds as 2018 unfolds that have pushed the dollar index close to the 90.00 level. The political wrangling that has engulfed the ability of the Senate to pass the budget and led to the shutdown of the Federal Government remains. A temporary solution was agreed yesterday that keeps Government offices open and allows a couple of weeks for a permanent deal to be struck.

It seems that positions are becoming ever more entrenched as the Democrats insist on a series of proposals, particularly around healthcare, that the President, in particular, is set against funding.

This is a story that will continue to dominate the dollar while the other headwind, that of the diminishing of the dollar’s rate advantage becomes a more permanent issue. The dollar hasn’t been able to rally on the back of three rate hikes in a little over twelve months and now with other G7 nations starting to withdraw stimulus, that potential support is set to disappear.

The dollar index is unable to rally past the 91.00 resistance and looks set to test the 90.00 level, should the ECB show any hawkish signs towards its Asset Purchase Scheme at its upcoming meeting.

Euro’s short-term direction to be decided on Thursday

The ECB hold the key to the likely short-term progress of the single currency as it meets on Thursday. Although it is highly unlikely that any immediate action will be decided this week the risk is clear that the withdrawal of stimulus will be discussed and a possible date for tapering agreed.

The Euro has risen by 6.5% since the start of Q4 ‘17 which has had a dampening effect on inflation across the entire region, but its continued strength will concern ECB President Mario Draghi as it could lead to a slowdown, particularly in the weaker economies, as they struggle to export goods and services.

Macroeconomic data has been generally supportive to a withdrawal of stimulus, but a feeling remains among those close to Draghi that there is no hurry to act while inflation continues to be well below the Central Bank’s 2% target.

The political situation in the eurozone has quietened considerably despite the Italian election approaching and the formation of a coalition Government in Germany no close to resolution. This is a longer-term issue facing the region, but the single currency continues to be stable. It continues to trade between 1.2150 and 1.2300 as various influences vie for control.

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.”