Back to the Future

Few positives for Sterling as stage two begins

2018, particularly the first half of the year, looks like being a tough time for Sterling. The signs that the economy is slowing, inflation rising and the consumer starting to tighten the purse-strings mean that the pound is likely to suffer. Of course, the entire scenario is dominated by the one single most important event faced by the U.K. in decades.

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.

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Changes at the Fed herald new era

The dollar has had an interesting year which, on reflection, has been dominated by the actions of the President. It started the year strongly with the dollar index well above the 100 level. The dollar has, historically, been very sensitive to changes to monetary policy and interest rate differentials, so it is something of a surprise that despite three rate hikes in the past twelve months, that the dollar has lost ten percent of its value.

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

I never thought it could survive the upheaval of the debt crisis and became the solid store of value it has become today. The Euro owes, if not its survival, then certainly its status in the global economy to one man. Mario Draghi has been President of the ECB since November 2011 which means he has served three quarters of his eight-year term. In that time, he has had to deal with several issues including the provision of monetary policy across nineteen incredibly complex economies beset by a debt crisis that threatened to engulf them.

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