Discussion and Analysis by Charles Porter:
In a year that could see the further normalisation of developed economies’ monetary policies as well as the restoration of volatility and geo-political risk; fortune may well favour the brave. However, on this, the first trading day of the New Year, fortune also appears to favour Sterling, with the Pound outperforming all of its G10 counterparts at market open. A weakening US Dollar also pushes the cable rate (GBPUSD) through its previous resistance level of 1.3550; just shy of September’s post-Brexit flash high. Following an outstanding year for the Euro, gaining around 7% on a trade weighted basis, it is unsurprising that the Euro trades at its strongest rate versus the Dollar in over three years (up to 1.2075).
Sterling Briefing: A Warming Channel
Tides have turned in the English Channel as the UK finds an ally in Northern France. Foreign Secretary and Leave protagonist, Boris Johnson, spoke of the inevitability of a favourable Brexit based upon the international bargaining power derived from the UK’s supposed obsession with Italian Prosecco, French wine and German cars. He was subsequently blamed and ridiculed by his international political counterparts for making an insulting and reductionist claim. However, concrete vested interests clearly now matter:
Setting forth his intentions for this year, the President of Hauts-de-France, a central northern region encompassing Calais and Dunkirk, has declared his intention to express leverage over the French President, Emmanuel Macron. The region is particularly exposed to Brexit given the high volume of trade that passes through the Channel. The timing of the announcement and endorsement of a softer Brexit could not be more optimal. However, this is no coincidence.
Secession negotiations will recommence soon, considering the all important future trading and security arrangements of the post-Brexit United Kingdom and EU-27. Similar support could provide Sterling with a floor to continue its defiance of GBPEUR parity and rally towards unbroken SR 1.1520 resistance.
Euro Briefing: Testing Ground
Despite being forecasted to contain two of the biggest political risks of 2018, the Eurozone is enjoying a bold market call. The lack of a coalition agreement within the Bundestag in addition to a considerable far-right composition is undermining the political stability of the Europe’s largest economy. Similarly, the Italian elections that are now little more than two months away could upset the single currency. The GBPEUR exchange rate has been mildly bearish towards the end of 2017. However, as the currency pair draws close to intersecting its moving average resistance, presently sitting just above 1.13, and previously broken fib resistance at 1.1384, the Pound’s future could soon become more transparent.
Dollar Briefing: 2017 Hangover
An unrelentingly bearish US Dollar has continued through to 2018, with the EURUSD currency pair opening above a symbolic 1.20, and passing comfortably through 1.205. The diagnosis of Dollar weakness remains under substantiated and, concerningly, a similarly erroneous remedy may be concocted. A re-priced tax reform has taken center stage for the re-priced US Dollar; a variable that many are increasingly viewing as a scapegoat for market movements that are challenging to explain. However, somewhat more concerningly, stagnant Federal Reserve monetary policy is being blamed for the Dollar’s weakness.
The European Central Bank has hesitantly restrained its asset purchasing program (or Quantitative Easing) to €30bn, commencing this January, in a puny move that was priced as a severely ‘dovish’ monetary policy announcement. Meanwhile, the Pound Sterling was hammered by what was seen as a corrective, ‘one and done’ interest rate hike. The outlook for US monetary policy remains dovish and if markets have started as they mean to go on, the Dollar could be in trouble. At UK market close this afternoon, the cable rate momentarily broke 1.36, a symbolic level that, if retested, opens up considerable headroom for the Pound’s appreciation.
The Days Ahead:
A US labour market report is due on Friday. Weak (wage) inflation now holds US monetary policy back; data that could be re-evaluated, moving the Dollar significantly.
Discussion and Analysis by Charles Porter