Discussion and Analysis by Charles Porter:
Consecutive days of gains for the Pound Sterling have been mildly reversed this morning. Trading slightly stronger overnight, the Pound has almost entirely eliminated the gains it made against the US dollar and the Euro at market open this morning. In the medium term horizon, the Pound has suffered most from a dovish Bank of England Decision. Meanwhile, the long term uncertainty surrounding Brexit underlies the absolute trading channel of the Pound—a phenomena we look towards tomorrow as Brexit negotiations continue. The Euro has appreciated from the lows of yesterday’s market open by almost 0.5%.
Sterling Briefing: Streak Over
The Pound has opened lower across the board, stunting the almost week-long gains that we have witnessed. While the market could simply be testing new ground following the emergence of a new monetary paradigm within the UK, it remains plausible that Sterling’s weakening is in fear of yet another underwhelming Brexit negotiation round.
Sterling markets are not hoping for miracles at any moment from the Brexit negotiations. Instead, something as simple as the linguistic tone, or even body language, between Brexit Secretary David Davis and the EU Chief negotiator, Michel Barnier, could be enough to prop-up the Pound. With the Financial Times this morning headlining the threat of mass-business exodus from the UK, there is considerable pessimism heading into this round of negotiations.
Euro Briefing: European Recovery
The Euro proved resilient against the US Dollar again yesterday afternoon, capping the interim peak in Dollar strength that has prevailed since last week’s European Central Bank monetary policy decision. The comeback seen yesterday afternoon has continued this morning, providing support to the hypothesis that the Euro’s decline against the Dollar was overdone.
We witnessed a brief acceleration to the Euro’s recovery yesterday as reports abounded that the ECB may not be as perverse to tighter monetary policy—as dovish—as Draghi makes the Bank appear. The report suggested that there was dissatisfaction and quasi-defection within the Governing Council with more hawkish members attempting to alter the path of European monetary policy.
Dollar Briefing: Risk Off
While the main major loser at market open this morning appears to be the Pound Sterling, there was also a considerable weakening of the trading value of the US Dollar. As President Trump arrives in China having left South Korea, markets are bracing for a more volatile series of press conferences and sound bites that will increase the already-magnificent political risk surrounding the United States.
During Trump’s election campaign and throughout the infancy of his Presidency, the relationship between the US and China, a globally significant trading channel, has been tumultuous. Moreover, as the crisis within the Korean Peninsula has matured, the relationship between China, including President Xi Jinping, and North Korea, including the supreme leader Kim Jong-un, has made for disturbing headlines. Trump’s aggressive foreign policy is therefore cowering Dollar markets a little lower.
The Days Ahead:
Today, the Reserve Bank of New Zealand will release their monetary policy decision detailing the Official Cash Rate. With an insignificant risk of a rate hike priced into New Zealand’s debt and currency markets, sentiment is certainly on the side of a no-hike. However, as the Bank of Canada proved a couple of months ago, central banks can always surprise us. Globally, geopolitical risk including, but not limited to, the acceleration of Saudi Arabian political tension, Brexit, and Trump’s tour will dominate the foreign exchange environment.