Back to the Future
December 27th: Highlights
- Sterling in grip of Brexit capitulation
- Dollar reactive to Trump/Powell
- Growing economy positive for Euro
Few positives for Sterling as stage two begins
Brexit was never going to be as easy as a simple in or out vote and, so it has proved. With the benefit of hindsight, a simple majority was always going to split the nation and create the havoc we are seeing now. The essentially “remain” credentials of the Government trying to “cobble together” a set of proposals to satisfy such opposing forces has led to chaos, backbiting and a general malaise that threatens to weaken the country’s standing in the world even more.
The pound closed last Friday at 1.3364 well above the average of its level over the past three months which is providing solid support. There are unlikely to be any drivers in what remains of this week to push it (or indeed any major currency) out of a narrow range, although the speculation over the weakness of consumer activity in the end of year sales may well leave it on the back foot as the market gets back to normal.
Changes at the Fed herald new era
Only time will tell, but the currency weakness can be put down to the “Trump effect”. The first year of Donald Trump’s Presidency has been characterized by division both domestically, driven by spats with Congress and the FBI and internationally by provocation of friends like the U.K. and the single-handed destruction of the Paris accord on climate change. The threat and counter threat of his “relationship” with North Korea has been something of a sideshow.
For the dollar, the first quarter of 2018 will likely be dominated by the appointment of a new Fed. Chairman in Jerome Powell. A lawyer by profession he will be the first Chairman to come from neither a banking or economics background. Powell has been unfairly tainted by the fact the he was personally chosen by President Trump for the role, but his credentials will be sorely tested by an economy that is growing at 3.3% YoY and a benign inflationary path that could turn at any moment.
Take a bow Mario Draghi
It is however his most recent efforts that are most praiseworthy, as he has managed to resist the clamour for a tightening of monetary policy either by hiking rates of the removal of accommodative policies put in place at the height of the crisis. Draghi has been strident in his defence of a steady policy across the entire region which has allowed the weaker nations to grow economically yet provided growth to the stronger ones (Germany) while inflation remains under control.
The single currency has been relatively stable moving most significantly in relation to other G7 currencies drivers. Brexit is seen as a uniquely U.K. issue which is very much outside the purview of the ECB and the fall in the dollar has been absorbed, with exports barely affected by the stronger currency.
This week’s events of note
A Holiday shortened week with no major data releases
- Christmas day
- Boxing Day
- US: House Prices – Strong growth has fed into Buoyant GDP. A rise from 36.2% to 6.3% expected
- UK: Mortgage approvals – Banks setting the bar higher with larger deposits and smaller multiples feeding through into lower consumer sentiment.
- UK: House Prices – Rising slowing as consumers starting to be more cautious.
- Eurozone: Economic Bulletin – Inflation expectations likely to drive single currency.
- US: Weekly jobless claims – Previous weeks rise will mean this data is studied to see effect on next weeks NFP.
- Eurozone: German Inflation – The bellwether report for the Eurozone although Mario Draghi apparently takes no notice. Prices likely to have risen modestly.
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.”