Discussion and Analysis by Charles Porter:
The US Dollar looked in a weak position throughout yesterday morning and into the early afternoon. However, the market open within the US saw a retraction from questionable Dollar weakness and move further away from a significant 1.20 against the Euro. Little changed yesterday to reverse the Dollar’s fortune with particular silence on the progress of Tax reform, the supposed cause of the Dollar’s weakness. This strength continues within the Dollar this morning, with the critical confirmation hearing of Fed Chair nominee Jay Powell at the Senate ahead. The UK Financial Stability Report from the Bank of England has found banks to be stable and in need of little adjustment to cope with potential Brexit disturbance.
Sterling Briefing: Irish Spillover
An Irish spillover is concerning Sterling markets this morning. Far from being some kind of cocktail, this is a pervasive spillover threat to the Pound Sterling from today’s Irish political activity. Controversy, complexity, and a deficit of accountable democracy surround the Houses of the Oireachtas, the Irish Parliament. The scandal is concentrated upon the actions of Deputy PM, Frances Fitzgerald. The Minister could face a vote of no confidence declaration today which, in turn, may lead to a general election within the country.
The current complexion of representative politics in Ireland is fragile to say the least. A set of agreements sees Fianna Fáil, Republican Party, abstain in key votes to allow Fine Gael, Ms. Fitzgerald’s party, to control a ruling coalition. However, as the scandal evolves, it is uncertain whether the House will honour this system and consolidation of power in the hands of those they feel to have done wrong.
The spillover to Sterling is not a new case of ‘the US sneezes and the UK gets a cold’. A solution for the Irish border is one of the pivotal issues that must achieve ‘sufficient’ progress before the EU Council, the 27’s heads of states, will agree to talk about the post-Brexit trading and social relationship between the UK and the EU. Ahead of the December Council meeting, Irish instability and the potential election of a new head of state could provide a considerable blow to the Pound. The Irish government remains in last ditch talks to avoid this possibility, but the threat weighs on Sterling markets today.
Euro Briefing: German Defiance
Yesterday, I criticised the interpretation of the Dollar’s weakness against the Euro’s strength in terms of domestic politics. I maintain this conviction, instead, isolating price and market action as the cause of the EUR/USD rally. This view has received support overnight with the Dollar consolidating its losses against the Euro and now moving back below 1.19. My argument revolved around greater political threat and uncertainty in Germany and the Euro area, than in the US. It seems that this theme extends further when we consider the relationship between Germany’s IFO economic sentiment indicator and GDP growth.
The relationship now suggests that the level of economic confidence in Germany is conducive with an economic growth rate of close to 6%. There is a disjunct between sentiment and outcome, therefore, arguably setting Germany up for a surprise in the coming months. At midday, Consumer confidence data is released and we await to see whether the public shares businesses’ surprisingly sanguine outlook.
US Dollar Briefing: Jay Powell
Federal Reserve Chair nominee Jerome Powell will appear before the Senate this afternoon. He is widely expected to be confirmed by the Senate. His words will be scrutinised to understand his stance on monetary policy during the hearing. The event of Powell’s non-confirmation would destabilise the Dollar, however, given Trump’s next-best persuasion towards John Taylor, the Dollar could receive an unlikely boost.
The Days Ahead:
The Canadian Dollar has underperformed. Weak inflation following hawkish monetary policy developments has weakened confidence in CAD. Low oil prices have similarly concerned the currency. Today’s Financial System Review and comments by Governor Poloz, in addition to Thursday’s OPEC meeting, will affect the Dollar significantly.