Daily Market Brief 23 Mar 2017

Political Reality Hits Trump and Dollar

March 23rd: Highlights

  • Vote on Obamacare rollback later
  • Dollar nears recent lows
  • U.K. Retail Sales due for release

Trump facing political uncertainty

President Trump’s first major political battle of wills is unfolding and the dollar is suffering from the fallout. Analysts see his difficulty in getting the bill to roll back the Previous President’s Obamacare legislation through Congress as the “litmus test” for his economic plans.

Both the Pound and Euro are trading near to recent highs at 1.2500 and 1.0800 respectively. The resistance just above those levels has held firm so far but upcoming events, political, economic and terrorism related could see them ultimately broken.

Yesterday’s terrorist attack in London only briefly affected the pound and it remains very well supported by speculation over the future direction of interest rates. Any correction has been shallow with 1.2440 providing support. Exporter buy orders have been raised following this week’s Brexit announcement.

Today’s retail sales data will add further to the picture that is developing of the pound’s trajectory during the Brexit negotiation and the economy struggles with high inflation and tepid growth. A slightly improved performance from consumers could lead to a rise (YoY ex-fuel) of a little over 3% in retail sales following last month’s 2.5% increase.

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Euro hemmed in

It is significant that, so far, in a year which was expected to be more turbulent for the single currency, the Euro has stayed within relatively narrow ranges.

The performance of the conglomerate economies of the nineteen member states added to the elections in The Netherlands, France and Germany have, so far, had little effect on the Euro which reacts to abundant liquidity by bouncing between well-trod support and resistance levels.

Technically, the Euro has traded between 1.0450 and 1.0820 so far in 2017. It is likely that the catalyst for any breakout will be the French election which takes place over the weekends of 24th April and 7th May. Various opinion polls first indicating the likely participants in the run-off followed by the result of that contest will provide some volatility within those ranges, but it is likely the result will be the diver which produces a new paradigm.

The latest polls show that Emmanuel Macron and Marine le Pen will contest the run-off being won by Macron 61% to 39%. A poll of voting intention shows that as many as 40% have so far not made up their minds.

Given the nature of a black swan event, an event that is totally unpredictable, 5000-1 and above, analysts who fear a Le Pen victory, are rather defeating the object!

New Zealand keeps rates on hold

One of the few global economies that is performing entirely predictably is that of New Zealand. Often lumped together as a mini economic bloc with Australia, New Zealand continues to have reasonable growth, benign inflation and a Central Bank which produces just the right amount of advance guidance but performs in such a manner that the currency remains buoyant.

Overnight, interest rates were left on hold and will be for some time per the per the press release following the RBNZ meeting.

By contrast the AUD fell by 0.3% to 0.7657, bringing losses so far this week to 0.6%. This follows last week’s gain of nearly 2%.

The safe haven JPY is the major beneficiary of the possible demise of the “Trumptrade”, struggling to 111.35 following Tuesday’s four month (JPY) high of 110.74.

Central Banker Speeches will provide guidance (Maybe)

Speeches later by two FOMC members will be preceded by one from an MPC member.

The focus for the pound has shifted away from Brexit (briefly) as the performance of the economy, broken down by economic releases, provides guidance. Dr. Ben Broadbent is likely to provide support for the Governor’s stance since he voted for no change at last week’s meeting. Any hawkish change will be greeted by a further bout of sterling strength.

Fed Chair Janet Yellen and her FOMC colleague, Neel Kashkari will both speak today.

Yellen’s speeches generally provide some advance guidance to the market and since the next meeting isn’t until May 2-3, she will be probably repeat her “if the data demands” rhetoric. Kashkari will likely provide confirmation of her view but any deviation will give further direction to an ailing dollar.

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.”