Daily Market Brief 24 April 2018

Dollar Strength adds to Sterling woes

April 24th: Highlights

  • UK Rate hike expectation below 50%
  • Long term dollar rates close on 3%
  • Euro testing medium term support

Brexit leaks preparing market for bad news?

Sterling continued to weaken against the dollar yesterday as the traditional “April rally” has been overcome by several negative factors. Last week’s data releases were universally unsupportive and with concerns over the first cut of Q1 GDP due for release on Friday the pound is likely to remain on the backfoot.

While there have been no official comments on Brexit for a few weeks, there are constant rumours regarding stalemate over the question of the Irish border. If Brussels remains true to form and continues to set demands which are “take it or leave it”, the UK could be in trouble as the Northern Irish Unionists who in effect prop up the Government will withdraw their support. The EU propose that Northern Ireland remain in the customs union, effectively hiving them off from the rest of the UK and moving the border to the middle of the Irish Sea.

The turnaround in sentiment towards the pound has been incredible even by the standards of the volatility it has experienced over the past two years. With interest rate futures now predicting less than a 50% chance of a hike at the next MPC meeting supports are gradually being eroded.

The pound made a low of 1.3926 versus a resurgent dollar but managed to recover a little versus the Euro which is also suffering from dollar strength reaching 1.1435 before falling back a little to close at 1.1418.

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Dollar benefitting from multiple tailwinds.

It is unlikely that North Korean Leader Kim Jong-un would ever have been considered the catalyst for a dollar rally, but it seems that his gesture in halting his country’s nuclear testing and research has proven to the tuning in point in the fortunes of the greenback.

Coinciding with weakness in other G7 currencies, the dollar index has broken above the resistance at 90.50 which had proven to be stubborn for some time.

The dollar has gained almost by default as the JPY and CHF have fallen as risk appetite improves, there is continued pessimism over the path of both inflation and interest rates in the Eurozone and the woes facing the UK and Sterling have already been discussed.

Long-term interest rates in the U.S. are rising with the ten-year Treasury yield approaching the psychologically important 3% level. This is providing support to the dollar index which reached a high of 90.99 yesterday and briefly traded above 91.00 overnight before falling back a little.

Trade and durable goods data is due for release on Thursday and although durable goods are a volatile indicator there will be interest to see if there has been any effect on the trade deficit form the recent introduction of tariffs on certain imports.

Euro at bottom of range

In a similar vein to the fall in Sterling recently, the single currency is also suffering from a of series of innuendos that appear designed to add to its weakness.

The prime reason the Euro is trading close to long-term support is the recovery of the dollar index of which it makes up more than 50% of the basket. However, there is a certain degree of importance being attached to this week’s ECB meeting despite there being no reason to expect anything other than the usual rhetoric from Sr. Draghi about the durability of growth in the weaker Eurozone economies.

There could be mention of the possibility of a withdrawal of the Asset Purchase Scheme but that is considered unlikely given the positive effect that would have on the Euro. Traders believe that the ECB is going to fall further behind both the UK and US in its monetary policy even though hikes are no longer imminent in either economy. That should keep the single currency under a little pressure. It reached a low of 1.2197 yesterday and fell further initially overnight reaching 1.2184 before rebounding back above 1.2200.

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.”