Sterling; Battered, Bruised, but higher
Morning mid-market rates – The majors
July 23rd: Highlights
- Sterling rallies as Trump comments push dollar lower
- Pound to be driven by economic factor as Parliament rises
- ECB unlikely to provide support to single currency
Sterling higher on Trump comments but further gains difficult
Recent economic data has virtually assured traders that their vision of a rate hike next month will not now be realized. Last week’s employment, inflation and retail sales data were uniformly weak and when added to the uncertainty surrounding Brexit mean that an emergency cut is more likely than a hike. With Ian McCafferty leaving the MPC, a more dovish committee is going to oversee monetary policy leading into Autumn which is probably no bad thing.
The impossibility of the Brexit negotiations will return to haunt the currency in September and if it were not for President Trump’s intervention, the pound would probably be below 1.3000 versus the dollar already. It closed on Friday 1.3130 having reached a low of 1.2957 on Thursday. Since the euro makes up a significant proportion of the dollar index, it fell further versus the dollar than the pound. The consequence of this is that the pound also gained against the single currency, reaching 1.1210 following its fall to 1.1168 on Thursday.
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Trump’s comments to be short-term driver for dollar
President Trump has decided that he now believes that rate hikes could be damaging for the economy and blames other economies for not keeping pace with the U.S. with the effect that the dollar is gaining in strength.
Presumably the President is in regular contact with the Fed Chair and is informed in advance of the Central Bank’s thinking. Tying together trade and monetary policy is difficult, and Trump sees a link between the U.S. trade deficit and the strength of the dollar which sucks in imports.
Currency manipulation is a hard issue to prove since it is always tied to monetary policy. For instance, the ECB, without question, is satisfied that the euro is weaker since it allows them (conversely to the U.S.) to export more. However, it is inconceivable that the ECB could decide to keep rates low, despite the withdrawal of the Asset Purchase Scheme simply to drive the currency artificially lower.
The dollar index fell on Friday following the President’s comments late on Thursday evening. It has barely moved overnight (0600 BST) remaining close to Friday’s close of 94.46.
ECB won’t provide support to single currency
It is difficult to accuse the ECB of manipulation since even the Bundesbank seems to agree with the current monetary policy being adopted by the Eurozone’s Central Bank, and their anti-inflation credentials are well known.
This week’s meeting will have an end of term feel about it as the members of the committee disperse for the summer vacation. It will confirm the removal of the Asset Purchase Scheme starting in September and while pronouncing themselves satisfied with the level of the currency, will confirm that there will be no rate hikes until Autumn 2019.
Such dovishness will push the euro towards support at 1.1550 versus the dollar and see the pound rally towards 1.1280.
The outlook for the euro looks to be calm and unless the immigration issue blows up again it is likely that the combination of dovish monetary policy and a lack of political factors will continue to encourage traders to sell on rallies.
On Friday, following President Trump’s comments it rose to 1.1739 before settling back to close at 1.1722.
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.”