Daily Market Brief 28 Mar 2017

Strong pound? No, Weak Dollar

March 28th: Highlights

  • Dollar falls on Trump credibility fears
  • Qatar investment plans dash U.K. investment fears
  • Euro and Pound break long term resistances

Dollar falls to medium term low

Sterling and the Euro gapped higher in Asia yesterday morning. This was the effect of the failure of Paul Ryan and Donald Trump to even get their Bill on rolling back Obamacare to a vote, let alone passed!

A gap is a technical trading name given to an asset which opens higher (or lower) than its previous close, thus creating a “gap” on a chart of that asset’s price movements.

Sterling closed at 1.2459 on Friday and opened at 1.2493 yesterday. If a gap is going to occur in the currency market it will generally be on a Friday/Monday. That time apart, markets are continuous, closing at 5.00pm in New York and opening at 11am in Wellington New Zealand. Both times equate to 10pm in London.

The gap was narrow, a sure sign of the liquid state of the market. There was a similar pattern on the chart of the Euro too.

The pound made a high of 1.2616 on the day, a climb of 1.5% from its low on Friday

There is no real evidence to suggest that President Trump is going to fail to be able to pass any of his legislative agenda through Congress and the Senate. Traders are nonetheless nervous given that the Fed’s interest rate strategy is partly driven by the amount of stimulus the President’s economic agenda will provide to the U.S. economy.

The dollar index fell to its lowest level since the election. It reached a low of 98.86 a fall of almost 1.25% from it’s high on Friday.

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Brexit Eve arrives

Yesterday’s rise in the pound flew in the face of traders who felt that the approach of the triggering of Article 50 would bring a break of the recent lows on the way to a test of the now crucial 1.20 level.

Having said that, the pound was almost unchanged on a trade weighted index of its performance. Against the Euro, the pound closed 27 pips lower at 0.8650. It was a similar story against the JPY. A narrow range and a close 30 pips higher.

The two-year process that will result in Britain leaving the EU will commence with traders having to accept that this is a one-off event without precedent. This is nothing like the departure from the ERM where the pound was forced out. There is no “one way” bet. Each “cut, thrust and parry” will need to be carefully analysed. There will be knee jerk reactions for the pound but, at the end of the day, the economic effect taking everything into consideration will be what matters most.

The U.K. will forge its own path with the threat that “no deal being better than a bad deal” hanging over the negotiations. There is no chance that Donald Tusk, the President of the European Council will allow an easy ride but he should be pragmatic in that there is a lot at stake for both sides.

Merkel victory bodes well for September

Rather surprisingly given what has gone before, Germany has managed to stay out of the “wave of populism” which had concerned commentators on this year’s elections. In the Netherlands, the Right-Wing candidate made a decent showing. There was no real upswing in support for Geert Wilders the populist/nationalist candidate. In France, Marine le Pen is doing reasonably well in polls. France is as notoriously volatile at elections as Holland is placid, so the jury is definitely still out on the outcome of their Presidential election.

Sundays election result in the German region of Saarland gave a boost to the ruling party and made the possibility of President Merkel winning a fourth term more likely.

The long term political stability of the Eurozone relies heavily on events in Germany so this result will have come as a welcome relief to those fearing a real upswing in nationalist sentiment.

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.”