30 December 2019: Sterling to react to economic conditions

30 December 2019: Sterling to react to economic conditions

Sterling to react to economic conditions

30th December: Highlights

  • Brexit trade talks unlikely to be positive for pound in short-term
  • Rising global risk appetite hurting dollar.
  • Euro gains remain limited

Von Der Leyen sceptical about Johnson’s timetable

The pound will have a wider range of drivers as the New Year begins as the Government hopes that the UK’s official departure from the EU will spur businesses into firming up investment plans that have been on hold for a considerable time.

While there has been a reasonable amount of growth over the past few years as the slowdown in the global economy has also hit the UK, Brexit has been a major drag.

Ursula von der Linden the newly installed President of the European Commission sounded a note of caution in a speech last week in which she said that both sides need to consider whether there is enough time allocated under Prime Minister Johnson’s timetable for agreement to be reached. She said she was extremely worried (not least as she now knows that Johnson’s threats regarding departure with no trade deal in place are real) about how little time is available.

The alignment of City of London rules with EU conventions may be a significant sticking point for Brussels, although, again, the UK holds the “whip-hand” given its dominance of not just European but global financial markets.

The Pound had an understandably mixed week last week given the lack of liquidity magnifying every move. It traded between 1.2904 and 1.3119 having retraced from the election euphoria that drove it to multi-month highs the previous week.

Considering your next transfer? Log in to compare live quotes today.

Greenback to start New Year on the backfoot

As the Federal Reserve relaxes, reasonably confident that its monetary policy stance together with its read of the U.S. economy are correct, President Trump will be coming to terms that there is more than one way to obtain the weaker dollar he craves to provide a boost to U.S. exports.

Having taken on China and gained “little more than a draw” over Beijing’s trading tactics, Trump will want to see growth increase and a significantly weaker dollar contribute to a lowering of the trade deficit.

Despite the impeachment hearing that will take place in the New Year, Trump is still odds on to be the Republican nominee and also odds on to win the 2020 Presidential election.

His hardcore support is far from traditional and has little interest in, or notion of, big business.

The dollar’s reaction to the trade deal that has been agreed with China despite it only being the start of the final agreement has been greeted internationally with an increase in risk appetite that has seen riskier assets grow in value.

There is a theory amongst financial commentators that the talks were intended merely as a sideshow while Trump believed he could force Beijing into accepting an opening of its markets to U.S. goods simply by using additional tariffs.

Should that be a genuine ploy it has backfired, while not spectacularly, but it has not provided the administration with the export boost they desired.

The year may be dominated by politics and the impeachment will be the first such event. Meanwhile, Traders will be waiting for the tenth when Jerome Powell will be expecting (or maybe hoping) that his approach continues to pay off as the December NFP is released.

The dollar index suffered in the holiday-shortened week. It traded between 97.82 and 96.92, closing at 97.01. It will be no surprise if the support at 96.80 is tested early in the New Year should positive noises over trade continue to resonate in Washington.

No major upside potential without solid fiscal policy

The European Union’s Economic Commissioner Paolo Gentiloni has joined the growing demand for greater fiscal union between the nations of the Eurozone.

He commented at an ECB Conference last week that low-debt nations of the Eurozone should significantly expand spending which would boost the region’ economy and provide high-debt nations to shore-up their economies.

There is a feeling of “what I have I hold” growing among the wealthier nations while the less successful countries are struggling to see any growth at all. This attitude, demonstrated by countries politicians, reflects the continuing undertone of nationalism sparked by disagreements over several issues, the most obvious of which is immigration.

The countries of Southern Europe don’t feel that enough is being done to spread the issue evenly, while France and Germany blighted by terrorist attacks, fight to maintain a moreFederalist approach.

The coming year will be significant in the Eurozone’s ability to grow into the major global player it clearly has ambitions to be. It is true that the trade agreement that has been reached between Washington and Beijing will doubtless reduce the strain on the region’s trading position, but internally, the imbalances over social care, military spending and taxation will need to be addressed.

It has become the market’s “policy” to sell into any degree of euro strength. If that is to be reversed, the talking will need to stop, and actions will need to be taken.

Last week, the single currency traded between 1.1069 and 1.1189, closing at 1.1176, threatening major resistance at 1.1180

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.”