Sterling resumes descent
July 24th: Highlights
- Trump based rally fades
- Dollar forms a base as economic reality remains supportive
- Euro awaits ECB meeting
Trump plays Canute as tide of dollar strength continues
The global scenario is that the U.S. is the only major economy, except for Canada, that is hiking rates consistently. There remains a chance that the Bank of England could hike next week but that will be a one-off, despite markets discounting a 70% chance that it will happen.
The dollar index, which consists of the currencies of six of America’s major trading partners may be a little outmoded now, but it is a constant that provides a gauge on the strength of the greenback by filtering out individual currencies peaks and troughs. It has constantly struggled over the past few weeks and months to break and hold above significant resistance at 95.25 and following a fall to 94.20 after the President expressed concerns over dollar strength and tightening monetary policy last week it rallied yesterday to 94.71 before closing at 94.60
The next meeting of the rate-setting FOMC is next week and it is considered too early for a further hike so market focus is on September 26 when Fed Chair Jerome Powell will get another chance to put his job at risk by defying his boss’s opinion.
ECB meeting to confirm earlier announcements
Its dovish stance appears to have gained traction in each of the nineteen members of the Eurozone despite each having its own reasons to hope for a more hawkish or even more dovish Central bank. The eurozone economy is growing at an annualized rate of 2.5% as at the end of the first quarter and as with other G7 nations, the release of preliminary Q2 data is imminent.
A characteristic of Mario Draghi’s terms as ECB President has been the degree of consistency he has brought to the role exuding a quiet determination to ensure that policy relates to the entire region.
His predecessors were very much political appointments and his successor is likely to bring a far more hawkish outlook, but for now, the hand on the tiller is charting a course through calm waters.
The single currency remains reactive, mostly to the machinations of the dollar which is reacting to the prospect of tighter monetary policy on one side and the desire of the President to see a weaker dollar on the other. It closed yesterday marginally weaker at 1.1692 having fallen to 1.1683 as the dollar recovered its poise.
Hard Brexit concerns threaten Sterling
As further damaging comments are made and Brussels considers the “Chequers Proposal”, the chances of something emerging that satisfies the two opposing wings of the Government and Michel Barnier, the Chief EU Negotiator are fading.
The EU clearly wants the UK to be part of the single market but must take a hard line over the four freedoms to discourage other members who may be faltering from moving further towards nationalism.
I wrote a few weeks ago that Sterling would do well to end this month above 1.3000 versus the dollar and it is clinging to that level having reached a low of 1.2957 yesterday before bouncing back to close at 1.3016. It is obvious that President Trump’s words overnight were directed at Beijing, Tokyo and Frankfurt but they gave a slight nudge to the pound as well. It has lost considerable ground versus the single currency reaching a low of 1.1168 yesterday and has continued to look fragile overnight. The pound is currently (0600 BST) trading at 1.1172.
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.”