Daily Market Brief 29 March 2018

Sterling Corrects as data disappoints

Morning mid-market rates – The majors







March 29thth: Highlights

  • Retail sales fall as cold weather disrupts shoppers
  • Dollar rallies on strong GDP
  • ECB finds Eur 10 bio “hole” in bad loan provisions.

Pound to set medium term high

The bad weather the UK faced in February from the so-called Beast from the East kept shoppers at home and had a consequent effect on retail sales, the data for which was released yesterday. Retail sales fell for the first time in five months, but this is likely to be a temporary blip with data returning to positive territory next month.This was, however, another minor setback for the pound as the positivity created by last week’s events is gradually eroded.

As the market winds down for the Easter weekend, there are two significant events which will bring added volatility particularly if the level of liquidity falls.

The first is the publication of GDP data for Q4 which carries a downside risk for the pound. Analysts expect the data to be unchanged at 1.4% but any significant deterioration will call into question the markets hopes for a rate hike in May and see the pound break support at 1.4060 which has, so far, held firm.

The second event is the possible announcement of a plan from the UK Government to solve the issue over the Irish border following Brexit. This rumour has been circulating for a couple of days and it is likely that there are discussions taking place with the DUP to ensure that there is no repeat of the previous confusion.

The pound fell to a low of 1.4070 yesterday and has remained close to that level overnight. Versus the Euro it traded in a narrow 1.1400/1.1450 range.

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U.S. GDP stronger than expected

The release of Q4 ‘17 GDP in the U.S. brought a little relief to the dollar which had been struggling with various headwinds. Growth was revised upwards to 2.9% for the period between October and December. The pace of growth in Q4 was a little slower than that in Q3 but the change is seen as insignificant. The U.S. economy is starting to perform a little better and react to the stimulus provided by tax cuts and various infrastructure projects.The dollar index rallied close to resistance at 90.20 making a high of 90.15 as the euro and pound lost ground. The data isn’t strong enough for the Fed to consider a change in its three-hike strategy, so the dollar’s rally is unlikely to take it through strong resistance at 90.50.

Lingering concerns over a prolonged trade war will “keep a lid” on the dollar, certainly until the release of the March employment report on April 6th.

With North Korean Leader Kim Jong-un having visited Beijing this week being a sign of the possible denuclearisation of the Korean peninsula, risk appetite should improve which may give a further positive boost to the dollar.

ECB finds a hole in bad debt provisions.

One of the major problems facing the ECB and therefore the single currency is the issue of bad loans in the balance sheets of Eurozone banks which, so far, have not been provided for. The size of the entire portfolio is close to one trillion euros and is the one area where Mario Draghi can be said to have failed to act adequately.Yesterday it was announced that a further ten billion euros of bad loans had been “discovered” during an audit of the data. That highlights the lack of accountability that is rife in institutions that are driven by bureaucracy. It is one of the major criticisms of the entire EU and one of the reasons for Brexit.

The single currency fell yesterday but remains above strong support at 1.2260. The most significant driver for the euro is monetary policy and the consideration of when the first rate hike will take place as a step towards normalization of monetary policy, although as with so many issues in the Eurozone economy, it is difficult, yet, to decide just what constitutes normal.

It is more likely that the region faces a continued low inflation, which is one of the reasons for the possibility of further Asset Purchases before the scheme starts to be unwound.

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.”