Daily Market Brief 25 April 2018

Sterling find support at lower levels

April 25th: Highlights

  • M&A deal lifts sentiment
  • Dollar continues to rally
  • Eurozone business confidence weakening

Pound stabilizing after recent fall

The recent fall in the pound, precipitated by a turnaround in sentiment following comments from Bank of England Governor Mark Carney, was halted yesterday as a huge M&A transaction in the pharmaceutical sector came closer to being accepted.

Japanese firm Takeda has improved its offer for UK drug maker Shire in a deal potentially worth forty-four billion pounds. Clearly the Japanese won’t need to buy that amount of Sterling immediately, but the announcement gave a welcome lift to the pound which had been languishing following a raft of negative news and economic data.

The pound rallied from Mondays low of 1.3926 to reach a high of 1.3988 and climbed a little further overnight reaching a high of 1.3998 before settling back a little. Further volatility can be expected ahead of the Bank of England meeting in two weeks’ time as market reaction to every piece of data is magnified. The market is awaiting Friday’s release of the first cut of Q1 GDP with expectation that the economy will have grown at just 0.4% in the period between January and March contributing to year on year growth of 1.4%

With Brexit receiving a rough ride through Parliament and Michel Barnier calling for further clarity from the UK, the path towards its departure from the EU is still strewn with obstacles.

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Dollar sentiment has turned positive.

It seems that sentiment towards the dollar has had a sustainable turnaround as traders become more positive towards the U.S. economy and long-term interest rates continue to rise. Just as headwinds have built up to drive the pound lower, the exact opposite has happened to the greenback and it looks like it is at the start of a sustainable rally.

Yesterday the dollar index rose to 91.08 before closing virtually unchanged from Monday, although it has started to climb again overnight as the Jpy weakened to reach above 109 for the first time in more than two months. Despite the Euro making up the major part of the dollar index, the performance of the Jpy is a more reliable indicator of dollar strength or otherwise.

Yields on ten-year U.S. Government bonds rose above 3% for the first time since early 2014, a sign that the economy is starting to pick up speed which in turn should attract the attention of the Federal Reserve to the path of short term rates.

Next week’s employment report will be significant, not for the headline growth in new jobs, but analysts will want to see how fast wages growth is improving as an early sign of price increases going forward.

Eurozone business confidence and activity starting to wane

The cyclical nature of economic growth and the fickle nature of the FX market has been perfectly illustrated by the performance of the Eurozone economy and the single currency over the past week or so.

The Eurozone economy which is still, relatively, in its infancy having come into being less than twenty years ago is performing above most economists’ expectations as the stronger nations are coping well with the need for low interest rates and continued monetary accommodation while the weaker economies are handling a strong currency well and still managing to export.

Now, despite the positivity that had been growing around the currency and acceptance of the ECB’s policy of dovish yet benign support, business confidence is starting to fall. Yesterday’s release of activity indices in Germany betrayed concerns that the country is going to have to continue to support weaker economies as the economic cycle reaches its peak.

The Euro is still trading within its wider 1.2520/1.2180 range but any sustained period close to the bottom will bring inflationary concerns and a fall below 1.2160 will start alarm bells ringing in Frankfurt.

Yesterday the single currency made a low of 1.2181 before rallying a little but has resumed its downwards path overnight. Tomorrow’s ECB policy meeting will be followed by speeches from ECB President Mario Draghi, who will hold his regular press conference, and several of his colleagues on the council who will speak on Friday. It will be interesting to note any hardening of attitude towards the removal of accommodation leading to a rise in interest rates

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.”