Daily Market Brief 25 January 2018

You Can’t fight City Hall!

January 25th: Highlights

  • Mnuchin comments push dollar lower
  • ECB Meeting to provide clues on Monetary Policy
  • Sterling rally continues despite incomes/prices gap

Treasury Secretary promotes weaker dollar

Speaking at the World Economic Forum in Davos yesterday Steve Mnuchin, the U.S. Treasury Secretary virtually endorsed a weaker dollar as part of the Administration’s economic policy.

Finally, the fall in the dollar since President Trump took office has some justification and traders can understand the reasoning behind the fall. Mnuchin was quoted as saying that “obviously a weaker dollar is good for us as it relates to trade and opportunities”.

This comment, following on from concerns over the rise in trade protectionism in the United States drove the dollar index to fresh multi-year lows. It reached 89.16 and the fall has continued in Asia with a fresh low of 88.82 (6.30GMT) being made. This is the lowest level recorded by the dollar index since December 2014.

Donald Trump this week returned to the subject of America’s previous weakness over trade adding severe tariffs to the import of washing machines and solar panels adding to growing concerns of a developing trade war.

The U.S. has had a “traditional” strong dollar policy stretching back to the nineties when it was a symbol of America’s economic power. Now with competition for trade volume having intensified, it is seen as a burden on growth rather than a curb on inflation to have a strong currency.

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ECB Meeting to provide more questions than answers?

Today’s ECB meeting was expected to be one of the most important in years even before the comments yesterday from the U.S. Treasury Secretary which led to an acceleration of the dollar’s recent fall.

The 1.2080 level which was rumoured to be Mario Draghi’s “line in the sand” for Euro strength now seems a distant memory despite that level only having been breached less than two weeks ago!

The Eurozone economy is undeniably starting to grow at an above trend pace but the rise in the Euro, if it continues, could see exports suffer. The U.S. continues to focus on regaining its share of world trade as a method of stimulating its own economy and a weak dollar now looks to be official policy.

At today’s ECB meeting Sr. Draghi faces the unenviable task of trying to dampen calls for a normalization of monetary policy by voicing caution about the future strength of the economy which could struggle with an appreciably stronger currency.

The single currency reached 1.2416 against the Dollar yesterday and its rally has continued overnight reaching 1.2460, within reach of the medium-term target of 1.2520. Draghi could easily “pour cold water” on the markets enthusiasm for the Euro today but it would be irrational for the Asset Purchase scheme should remain in place given the pace of growth.

Sterling rally becomes clearer.

The pound’s recent strength was brought into clear focus by Treasury Secretary Mnuchins comments in Davos yesterday. While it has rallied by more than 2.5% versus the single currency, the rally versus the dollar has been more significant. Having broken through the 1.4000 level, which was important both technically and psychologically yesterday, Sterling is now seemingly headed towards retracing the entire fall made at the time of the Brexit referendum.

However, as the rally extends, the fear for any correction is that it would be both sharp and violent. The enthusiasm that has built over the prospect of a favourable trade deal being reached in Brexit talks will start to fade and its effect will be limited. Any further rally will be driven by continued dollar weakness rather than any more demand for Sterling. As the long-term short positions are nullified and closed, a fall is more likely to be versus the Euro than the dollar.

The pound made a new post-referendum high of 1.4242 yesterday and this has been extended to 1.4329 overnight. Versus the single currency the pound has also made ground reaching 1.1500, matching the high made on December 8th.

Yesterday’s employment report had no significant effect on Sterling although the unchanged 2.4% increase in hourly earnings narrowed the gap between incomes and prices and could have longer term significance.

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.”