Daily Market Brief 24 January 2018

Sterling breaks 1.4000

Morning mid-market rates – The majors







January 24th: Highlights

  • Sterling makes another post-Brexit high
  • Stronger than expected Consumer Confidence pushes Euro through resistance
  • Dollar weakness contributing to Euro and Sterling gains

Sterling achieves medium term target

The pound has rallied by more than 4% versus a weakening dollar so far in 2018. There has been a mixture of factors that have contributed to this stellar performance, but it is optimism over the terms the UK will obtain for stage two of Brexit that has been the major factor.The fall following the Brexit vote from around 1.5100 to a low of 1.1986 has now been 68% retraced now which means that the medium-term target has been reached and the pound stands at something of a crossroads. The rally since the decision to move to stage two of Brexit negotiations has been virtually omni-directional and some form of correction is now becoming overdue.

Sterling also rallied versus the single currency yesterday making a fresh high for 2018 of 1.1413 before falling back a little to close at 1.13,69 although it has resumed the rally overnight again clawing its was above 1.1400.

Today sees the release of the employment report in the UK. With the labour market already tight, the risk is for a surprise fall in the number of new jobs created. The markets focus will be on the hourly earnings data that should show a marginal narrowing of the gap between incomes and prices following last week’s fall in inflation.

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Market focus turns on Frankfurt.

Tomorrow’s meeting of the Governing Council of the European Central Bank is being viewed with growing significance. It now seems impossible that ECB President Mario Draghi won’t announce a timetable for the withdrawal of stimulus measures that have been in place since the financial crisis. Withdrawal could begin as soon as Q2 which is sooner than had at first been expected.The euro has resumed its rally towards its own medium target at 1.2520 following a very healthy correction that shook out the weaker longs and left the core positivity intact. The Euro made a high of 1.2307 yesterday closing virtually at its high of the day. The rally has continued overnight with a fresh high of 1.2336 (6.30GMT) being made.

The sense of anticipation around the Euro was heightened yesterday following the release of Eurozone-wide consumer confidence data that virtually confirmed that fears over the financial crisis have now passed.

The current rally in anticipation of an announcement by the ECB could be tempered should Sr. Draghi voice concerns over the currency strength of the currency. The dampening effect of a stronger currency on inflation is counterbalanced by its effect on the ability of the weaker countries to export goods and services.

Dollar weakens further.

Sentiment is a powerful driver in FX markets, not easy to gain but very easy to lose. The dollar’s fall has gained fresh momentum as markets lose confidence in the drivers that should provide support.There is scepticism over the pace of rate hikes in 2018 with three being discounted by futures markets. The appointment of Jerome Powell as the new Fed chair is now looming following his approval by the Senate yesterday. The size (84-13) of those voting in his favour will solidify his mandate despite the slightly doubtful credential of being proposed by President Trump.

Powell is known to favour low interest rates but also subscribes to a normalization of monetary policy sooner rather than later

The dollar index has continued its recent fall making a fresh multi-year low of 89.82.

Manufacturing and services sentiment indexes are released later today, and they are expected to continue the recent positive outlook. Friday sees the release of the first cut of preliminary Q4 GDP with headline growth expected to have fallen back a little to 3% following the final Q3 number of 3.2%.

The current dollar weakness has coincided with positive sentiment for other G7 economies which has exacerbated the dollar’s fall. This has magnified price action in the FX market considerably.

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.”