ECB and Trade Drive market

Trump trade rhetoric adds confusion

The longer the back and forth over tariffs on steel, aluminium and EU manufactured vehicles goes on, the more probable it becomes that the whole subject is simply a ploy to both increase the U.S’ share of global trade and drive the dollar to levels that make exports more competitive.

The issue with driving the dollar lower is that the currency has a dual role. In addition to being America’s currency it is a global reserve currency that nations rely upon to hold their overseas reserves in. Any prolonged weakness in the dollar prompts questions over that reserve status and as the twin deficits grow the dollar falls further and makes the prophecy self-fulfilling. It has always been a question in academia. The U.S. relies on countries with a budget surplus to fund its own deficit relying on a credo of “well that have to place their overseas holdings somewhere”.

However, the dollar is vulnerable to the rise in the Euro and China. The early days of the single currency were dogged by the debt crisis and the whole issue of the currency’s credibility. Times are changing and as the Eurozone “project” matures so will the acceptability of the currency as a store of value. It has long been considered that as China’s economy emerges as a global behemoth its ambitions will become clear which could signal a reduction in the dollar’s importance.

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ECB to test the water?

The risk at today’s meeting of the ECB is for a more hawkish outlook to be introduced although in typical Mario Draghi style any change will probably be subtle and subject to interpretation.

Concerns are beginning to grow that the ECB could “fall behind the curve” once inflation starts to pick up and preparations need to be in place to ensure they are able to react quickly. There is nothing, so far, in the data either current or future that would lead to a belief that rates will need to be raised quickly or even that inflation is starting to pick up. Despite that, the risk following today’s rate decision (unchanged) and press conference is for a slightly more hawkish outlook.

The single currency trod water yesterday as the dollar recovered a little ground. It remains very well supported at 1.2360 and that level was not even close to being tested yesterday. The euro made a low of 1.2384 and closed at 1.2412. Any rally towards the medium-term resistance at 1.2520 will need to be based on something a little more solid than perception but any sign of a change in the attitude of Sr. Draghi at his press conference later could be the catalyst.

Brexit transition deal close?

It is hard to imagine that the EU and UK could agree a transition deal, seen as a prelude to an agreement on the “future relationship” given how far apart the two sides appear to be. However, Philip Hammond, the Chancellor of the Exchequer has concluded that a deal should be struck within a month. The fact that he also said that financial services should be central to any deal poured a little cold water on his assumption given Brussels attitude to “cherry picking”.

The EU’s all or nothing attitude to any future deal shows, among other things, just how jealously they covet London’s place in global markets and finance and Frankfurt and Paris see an opportunity to usurp that pre-eminence following Brexit. Frankfurt is already wooing such global giants as Goldman Sachs to relocate following Brexit.

The pound is in a reactive mode as the market continues to see Brexit as “out of sight out of mind” preferring to react to fact rather than hopeful comments. It continues to climb away from the recent low of 1.3711 seen last week and has risen in small increments for five consecutive days, closing yesterday at 1.3913. It is rumoured that large selling orders are placed between 1.3980 and 1.4000 and this should ensure that any rally peters out quickly.