Discussion and Analysis by Charles Porter:
Yesterday afternoon, the US Dollar only continued its unrelenting advance. Since the beginning of December, the Dollar has gained almost 1.5% against its shared currency counterpart, the Euro. The EUR USD cross now threatens 1.17. The most notable event of today will be an interest rate decision by the Fed’s Open Market Committee. As the Fed continues to sit today, following the commencement of the meeting yesterday, Dollar markets can still be moved on speculation ahead of the event. Ultimately, the Fed’s decision looks like a foregone conclusion; a 25 basis point hike in interest rates. However, ahead of this decision, all-important CPI inflation data, the facilitator of central bank action, will be released.
Sterling Briefing: One More Sleep…
… Until the judgement period begins! As we all count down the days up to the culmination of the festive season, for markets at least, there are several hurdles in the way. Thursday and Friday mark the deadline for first round Brexit progress in 2017. The probability of Brexit defeat at the end of this week remains minimal; self preservation and the reputation of Commission President, Jean-Claude Juncker, and European Council President, Donald Tusk, would suggest that the declaration of progress is in the bag.
The European Council meeting for December will start tomorrow. Headlines should not take long to start flowing as rumours already abound about the likely concretization of the supposed progress on Brexit. With the political scene in Germany clearing, yet still highly uncertain, there will be other concerns at the Council summit. Similarly, the recent instability within Ireland and the resignation of Deputy PM, Frances Fitzgerald, could dilute an otherwise Brexit-centric affair.
Ahead of the European event, markets will receive data on the UK labour market, a key variable to the value of Sterling when considering the Bank of England’s fixation upon low wage inflation amidst strong price inflation. This event may prove to move the Pound further than normal due to the temporal proximity of the data release to tomorrow’s Bank of England monetary policy decision.
Euro Briefing: The Bigger Picture
Hard data matters; economics matters; monetary policy matters; politics matters. These are facts and most of the time are rightly treated as indisputable axioms of the modern world. However, markets and individuals appear to be split on how much ‘soft’ data and sentiment matters.
Academia has advanced the efforts of, to name but one example, behavioural economics, and the marriage of psychology and sociology to Economics. Sentiment truly matters over the long run. Despite the current losses for the Euro against the Dollar and, for that matter, the Pound since Mid-November, the Euro is up by over 7%, on average against the world’s major currencies in 2017.
In terms of sentiment, ask yourself: can we truly consider the European Sovereign Debt Crisis that destroyed the value of the Euro since 2010 to be over? I, and many others tacitly would argue; yes. The normative sentiment of an un-marred Euro has made it a good long purchase throughout this year.
Dollar Briefing: Plain Sailing
Janet Yellen, the present Chair of the Federal Reserve in the US, will leave office in 2018. President Trump has nominated ‘Jay’ Powell to become the new leader of the Fed in a move that is unlikely to change the status-quo outside of financial regulation, but nicely puts an egoistic President’s stamp on the monetary policy authority.
Due to the change of leadership, Janet Yellen’s words at the Press Conference following tonight’s monetary policy decision are unlikely to move markets; she is no longer salient in the attempt to predict future monetary policy. As such it is likely to be plain-er sailing than normal during tonight’s decision. A 25bps hike is 98% priced into the currency making the USD upside potential minimal.
The Day Ahead:
The ECB, the Fed, and the Bank of England will all produce their monetary policy decisions within 18 hours of each other. With the Fed kicking off proceedings this evening, today remains the last full day to price in expectations within the Pound and the Euro.