Daily Market Brief 26 February 2018

Brexit to return to Centre Stage

February 26th: Highlights

  • Opposition to call for membership of Customs Union. Government to outline plans later
  • Fed’s Powell testifies before Congress
  • Italian election to bring uncertainty to Euro

Central Banks getting their own way.

It is often said that, in the long, run no matter the outside influences and drivers, Central Banks tend to manage to get currencies to behave as they desire. This is a phenomenon we are seeing in the market currently with the Euro, Sterling and although a little less certain, the dollar.

The European Central Bank is clearly, as defined by President Mario Draghi and his colleagues, concerned about the Euro gaining any more strength following its 20% rise over the past 15 months or so, since this could prove difficult for the nascent growth that is being seen in the weaker economies of the Eurozone currently.

In the UK, the Bank of England wants a stronger pound. This will ward off the increase in inflation and act as an anchor on import prices. It is a lot harder for Fed. or Treasury in the U.S. to influence the dollar given the number of drivers that affect the greenback. However, the confusion wrought by the conflicting views of President Trump and Treasury Secretary Mnuchin have fed through into a chequered performance over the past few weeks.

Using the Gbp/Eur rate as an example, it is difficult to make a case for the recent Euro weakness without factoring in a little interference from either the ECB, BoE of both.

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Brexit policies; Better late than never

The Government and opposition will set out their expectations for the future relationship between the UK and EU following Brexit this week with the Labour Party starting with its “shot to nothing” later today.

The Labour Party is neck and neck with the Government in the latest opinion polls so must be a little more realistic in its planning since those plans could come into being were there to be a general election in the next six months.

Labour wants to remain a member of some form of customs union and would negotiate such a deal. The Government is going for a complete break with the single market which was the essence of the original idea of Brexit. Donald Tusk, the President of the European Council has already called the Government’s proposals “fantasy”.

Despite countries like Norway, Switzerland and Turkey who border the EU having their own “deals” with Brussels, there is nothing already in place the encompasses what the UK desires but equally none of those states has the prize that is so cherished by the EU; pre-eminence in Financial Services.

The pound is unlikely to react too much to the proposals until the EU gives its opinion. It reached a high of 1.4006 on Friday but has started the new week a little higher reaching 1.4028. Versus the Euro it remains in a positive channel reaching 1.1380 on Friday although there is rumoured selling interest close to 1.1420.

Powell to continue data dependent policy.

Jerome Powell, the Chairman of the Federal Reserve will make his first appearance before Congress this week as he continues to settle into his new role. While the jury is still out of the speculation that surrounded his appointment and how he will differ from his predecessor, he is most unlikely to put forward any radical thoughts or ideas on future monetary policy. He won’t confirm any structured attitude to rate hikes and will use the “data dependency” line to back up his future actions.

While he was expected to be more analytical and less pre-emptive that Mrs Yellen, he is unlikely to stray too far from her policy, certainly in the short term.

The dollar index had a mixed week last week, testing resistance at 90.20 before falling back. It has opened this week a little lower reaching 89.62. The Powell testimony will be the highlight of a relatively light data week with the US employment report delayed until March 9th.

The Italian election will provide little volatility to the single currency towards the end of the week, but it will some time before the bargaining has finished and the new Government takes its place in Rome.

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.”