Tag Archives: Dollar weakness

Medium Term Eurozone Review

Discussion and Analysis by Charles Porter:

 

Mid-April saw the beginning of a consistent and predictable bear (downward) trend in the value of the Pound Sterling with respect to the Euro (GBPEUR). Up until the start of September, the Pound lost, on average, 2.14 percent each month. This staggering trend would have seen Sterling fall to a value of parity against the Euro as soon as December; one Pound would equal one Euro. However, largely down to Bank of England action, the seemingly relentless bear trend abated, allowing the Pound to arguably find a new support. Following a Bank of England policy change a couple of weeks ago, Sterling has entered into a comparable, if not more severe, downward spiral that would threaten to achieve parity by February. While markets may try, this doom and gloom appears overplayed.

 

 

 

 

In a bout of combined Euro strength and Sterling weakness, there was a sustained and rapid devaluation of the Pound-Euro currency cross. At the same time as the Euro made a significant correction against the US Dollar, the Sterling-Euro exchange rate was on course for parity by Christmas. Much to the relief of those liquid in the UK market, the trend abated, reversing the fortunes of Sterling currency markets.

 

At least the concretisation of this trend was achieved through central bank action. In the minutes released alongside the Bank of England’s monetary policy decision on 14th September 2017 was one crucial paragraph that changed Sterling’s short-medium run outlook. Paragraph 30 of 38 explicitly stated that the interest rate was likely to go up at a faster rate than the market-priced yield curve was suggesting.

 

The importance of monetary policy to the international system is hard to understate. In a world of leveraged financial markets and indebted sovereigns, the rate of interest, the primary instrument of monetary policy, has significant impact. The rate of interest has twofold significance. Used to manipulate the macroeconomy, the interest rate mechanism determines both the cost of borrowing and the reward for saving.

 

At the individual level of personal savings, the effect may seem insignificant. However, when aggregated, for example to the volume of a large pension fund, the rate of interest in nominal terms becomes inconceivably large. Moreover, the rate of interest, as suggested above, will impact sovereigns starkly.

 

The sovereign bond market is highly sensitive to the underlying rate of interest and determines the rate of return that sovereigns, governments, will pay upon its stock of debt and newly issued bonds. Therefore, the rate of interest has systemic importance.

 

The response within currency markets that we see to the rate of interest is primarily down to the reward effect. A higher rate of interest will encourage money into the domestic economy and the domestic currency because investors and traders will receive a higher rate of return. When monetary policy continues to be threatened by the zero-lower bound, there is an additional confidence effect to beginning to normalise interest rates.

 

In addition to this support, price analysis could reveal that a new price floor has been created with the Pound Sterling appearing to trade within a medium term horizontal band against the Euro. However, there is also a significant probability that we are trading within a downward orientated channel.

 

From the trend that commenced around the turn of November, there are moments where the best fit curve, or OLS regression, will demonstrate a severely downward facing trend. From the start of November until the mid-November, the average market trend would dictate that by mid-February, the exchange rate between the Pound and the Euro would fall to parity; one Pound = one Euro.

 

Before you get terrified, pull your money out of UK markets or never travel abroad again, the trend by no means dictates that his will happen. There will be Sterling support and Euro resistance levels that would be expected to dissuade the Pound from falling too close to this level. However, a test of this level is definitely not out of the question.

 

The past few weeks especially have taught us that politics matters. Arguably making the significance of economics and economic data fall towards zero, the tumult within the UK government and Brexit negotiations has been able to stun the Pound.

 

Overwhelmingly, the deviation of the Pound Sterling from its pre-September bearish trend is highly positive for the future of the Pound. Without this, the risk of a test of parity would have continued to be significant. The management of the Brexit negotiation process will be the primary determinant of the value of the Pound, particularly as we approach mid-December and the verdict for second phase progression. A considerable number of positive expectations currently surround the Brexit process following Tusk’s optimism and praise of the Florence speech. These expectations are already priced into the currency cross. Disappointing these expectations could be disastrous for the Pound.

 

 

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German Coalition Talks Collapse

Discussion and Analysis by Grace Gliksten

 

The prolonged struggle for Angela Merkel to form a government under her leadership collapsed last night. Christian Linder, leader of the centrist Free Democrats Party, the FDP, announced just before midnight that the party was pulling out of talks with Merkel’s conservative alliance. He said that the parties had been unable to see past their differences on policy and had been unable to develop “a basis for trust and a shared idea.” He later said “it is better not to govern than to govern badly.” Merkel, and the other party leaders, however, claimed that a coalition deal would have been possible, insinuating that the FDP was responsible for the breakdown in talks.

 

The deadlock marks a break away from the vision of political stability and certainty that Germany prides itself on. Negotiations, which became increasingly acrimonious, faltered on a number of different issues. Merkel’s divisive immigration policy caused friction within talks, with the current liberal refugee policy at odds with the more conservative ideals from the FDP. One million asylum seekers have been let into Germany since 2015 by Merkel’s policies, which has incited criticism and has pushed voters towards the far-right Alternative for Germany Party. Although the FDP wants to maintain Germany’s open borders, this is only to control the inflow of migrants. The parties were also at loggerheads when it came to environmental policies, with the Green Party wanting to phase out the use of coal and combustion engines, while the FDP emphasised the need to protect such industries and jobs.

 

Europe’s largest economy is now set to face an unprecedented political crisis amongst the increasing prospect of new elections. Following disappointing election results in September, the anticipated coalition was Merkel’s last and only shot at forming a new, majority government. The Social Democratic Party, SPD, Germany’s second largest political party, has ruled out joining Merkel again for another coalition government. Following the September election, one senior SPD figure, Thomas Opperman, said that a coalition would only be possible if Merkel were to step down, highlighting the risk to Merkel’s position that the breakdown has created. Merkel’s last option is to form a minority government with the Green Party, however, she has indicated that she is opposed to this due to the instability it would cause. Similarly, individuals have criticised the idea with Thomas Kreuzer, one of the negotiators in the coalition talks, saying that a minority government would lack the authority both Germany and the EU need at the present time. The SPD have also said that they would not “tolerate” a Merkel-led minority government.

 

The breakdown in talks has also put Europe’s longest serving leader in trouble, as it is not certain that Merkel’s party will want her to lead them into a new campaign. It is likely debate will now focus on Merkel herself, and whether she commands enough power and influence to continue to hold together a strong government. Top selling German newspaper, Bild Daily, said the failure to forge an alliance, nicknamed the “Jamaica coalition” due to the parties colours matching those of the Jamaican flag, put “her chancellorship in danger.” In similar vein, a poll by Welt Online found that 61.4% of people surveyed claimed that the collapse of talks would call an end to Merkel as chancellor.

 

The Euro took a tumble following the announcement, trading 0.5% lower against the US Dollar and taking the Euro to its lowest level in four days. The Euro was also down 0.6% against the Japanese Yen, to a two-month low, and was down 0.43% against the Pound, trading at 1.125.

 

 

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Eight Weeks On:

Discussion and Analysis by Charles Porter:

 

The start of what promises to be an interesting and path-defining week has begun with similar action. The Euro lost considerable value overnight while coalition talks between Ms Merkel’s Christian Democratic Union and the Free Democratic Party unfurl. Whilst the evidence builds around May’s willingness to increase the Brexit ‘Divorce Bill’ offer and reinvigorate negotiations, the Pound has opened higher. Despite divided opinion about Phillip Hammond’s Andrew Marr Show performance, the sound bites therein, namely the prospect of ‘serious progress’, are also likely to have supported the Pound this morning.

 

 

Sterling Briefing: Brexit tailwind

 

 

The Pound Sterling has rallied mildly this morning largely on the back of Brexit news and sentiment. Over the weekend, the Financial Times published that Theresa May is willing and likely to up the Brexit Divorce Bill offer. This offer would be likely to facilitate progress in otherwise stagnating Brexit negotiations. Ahead of an EU Council meeting in December and the EU’s deadline for ‘sufficient progress’, progress early on in the 2-year Article-50 limit will be essential to supporting the Pound Sterling.

 

Today, the Economy and Industrial Strategy Committee, May’s Brexit-focused high salience Cabinet Committee could support, and thus allow, the increased offer. The number, in the order of billions, on offer remains significant, with the highest estimates equating to 5% of household disposable income. However, markets will be focusing on the sustainability of a post-Brexit transition and future UK-EU relationship.

 

 

 

Euro Briefing: Eight Weeks On

 

 

Around midnight last night, the German centrist party, the Free Democrats, walked out of coalition talks with Chancellor Merkel’s CDU. Unsurprisingly, the Euro reacted negatively to this news, sustaining its most significant and stark loss in three weeks. Eight weeks on from the German election and Merkel’s fresh mandate to govern Europe’s largest economy, the future of the Bundestag looks uncertain.

 

The previous coalition between Merkel’s CDU and (now) Schulz’s Social Democratic Party has already been ruled out by the former President of the EU Parliament. Therefore, what shocked the Euro overnight was the possibility that either Merkel must govern from an unstable and unprosperous minority position, or, hold another election. With the threat of Germany’s rightwing political movement subdued, yet still fresh, another election could weigh heavily on the political and economic stability of Germany. Germany, the world’s 4th largest economy, contains the propensity to unilaterally alter the value of the single currency. Throughout this morning’s trading, the Euro has regained value against the US Dollar despite the weekend’s disappointment.

 

 

 

 

US Dollar Briefing: Free Ground

 

Recently, there has been two common themes to explain Dollar weakness. Firstly, a rise in global political risk results in a risk-off market sentiment that harms the US Dollar in favour of safe haven assets. Alternatively, Trump’s long-awaited tax reform faces an inhibition. For now, the tension surrounding the Peninsula looks to have softened mildly. However, the ambivalence of the Dollar to Thursday’s House of Representatives approval could leave the path of the Dollar uncertain during an otherwise quiet week.

 

 

 

The Days Ahead:

 

This week could prove decisive for international currencies, not least the Pound. On Wednesday, Chancellor Phillip Hammond will deliver the Autumn Budget to Parliament. Largely expected to be dictated by the housing-focused sentiment of Theresa May’s Conservative Party Conference speech, a politically and publicly successful budget will be critical in escaping the familiar politically-driven devaluation of the Pound Sterling.

 

 

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SGM-FX View of london

Brexit Divorce Bill

Discussion and Analysis by Charles Porter:

Sterling has received a boost at market open this morning primarily on the back of hearsay. The enduring battle over the Brexit divorce bill continues to weigh on the currency, however, it is reported that the establishment and leadership might be willing to up their offer. The US Dollar has continued its bear trend into this morning, failing to grasp any support from the passing of Trump’s tax reform through the House of Representatives. Draghi speaking in Frankfurt this morning will provide a clarification of European monetary policy following its weak decision to start tapering quantitative easing as of January.

 

 

Sterling Briefing: May may pay!

 

The UK PM, Theresa May, could, perhaps, be willing to up the value of the UK’s offer to the European Union to facilitate second round negotiations concerning the UK’s future relationship with the EU27. Whilst May travels to Sweden today to meet at a summit of EU leaders, the potential for progress has supported the Pound this morning.

 

As foreboded at the beginning of the week, UK data sensitivity has been subdued. At least in comparison to political developments, this week’s inflation, retail and employment data have barely scratched the surface of Sterling currency crosses.

 

Whether the potential UK concession is mere speculation and rumour or a signal of genuine momentum and progress will determine the longevity of this morning’s episode of Sterling strength currently to the order of 0.4%.

 

 

 

Euro Briefing: Euro Draghi-ng its feet

 

The Euro lost considerable value following a dovish and weak tapering of ECB quantitative easing last month. This morning, Mario Draghi gave a speech in Frankfurt at the European Banking Congress in a major opportunity for citizens, traders and investors to understand the future path of quantitative easing and monetary policy.

 

The transcript of Draghi’s speech was published before he began to speak in Frankfurt. The initial market reaction was positive, with the Euro appreciating by around 0.1%. However, throughout the course of Draghi’s delivery, markets jostled to see the Euro drag its feet and struggle against the US Dollar. Draghi offered mixed messages: inflation remains fragile whilst the Eurozone is in a solid economic expansion.

 

 

 

Dollar Briefing: Back me up here, guys

 

Economics and Politics are both unequivocally standing on the side of the US Dollar, however, are failing to do much to offer it support.

 

Shown in the graph below, the US Dollar has lost in excess of 1.3% throughout this week against the Pound, following Sterling’s dramatic weekend devaluation. Let’s look at the facts: the Pound has been marred with political scandals, Brexit stagnation and below-expectation economic inflation. The Dollar, in contrast, has had its headline tax reform bill passed through the House of Representatives and a lucrative, and surprisingly stable, Asian Presidential Tour. Therefore, the Dollar appears in need of back up from the indicative support of underlying political and economic trends.

 

 

 

 

The Days Ahead:

 

 

The Bank of Canada surprised us a couple of months ago with two consecutive interest rate hikes. Following the decisions, Canadian inflation looks depressed with the Consumer Price Index likely to show a meek change in the aggregate price level. Data released at 13:30BST will be CAD-market sensitive. Unless the Sunday Times delivers another stunning blow to May’s Cabinet, the weekend could be relatively subdued.

 

 

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Figures

Daily Roundup

Discussion and Analysis by Charles Porter:

The UK labour market remains healthy. Yesterday’s statistics release reflected the UK labour market in quarter three of 2017. The headline change was a moderately sharp fall in employment. However, when contextualised, this change looks insignificant due to the sustainment of a hyper-low unemployment rate, unparalleled for decades. Therefore, Sterling traded roughly unchanged at the release. The most important variable at present, wage growth, came in unchanged at a yearly 2.2%. A smattering of positive US data yesterday afternoon similarly left the dollar relatively unsupported.

 

Sterling Briefing: Brexit and Interest Rates

 

Yesterday afternoon, we travelled over to the London School of Economics to bring you live updates as Deputy Governor Dr. Ben Broadbent spoke on the theme of Monetary Policy and Brexit. One member of nine decision makers on the Monetary Policy Committee (MPC) of the Bank of England, Dr. Broadbent provided a surprisingly hawkish (hike-biased), yet uncertain, view of monetary policy amidst Brexit.

 

The forward guidance contained within the Bank’s monetary policy decision on 2nd November sent the Pound spiralling downwards. This guidance suggested that rates were likely to rise only twice over the next three years. Higher interest rates generally create value for a currency, and thus the Pound lost value as its rate threatened to drag.

 

Yesterday’s event revealed that interest rates are likely to be far more malleable than the MPC made it appear. Dependent upon the convergence of household and market sentiment over Brexit, interest rates could raise faster than previously believed. As many BoE members head to Liverpool, the Pound could experience upside gains if Dr. Broadbent’s colleagues on the MPC profess a similar, hike-biased, view.

 

 

 

Euro Briefing: Medium Term Review

 

Mid-April saw the beginning of a consistent and predictable bear (downward) trend in the value of the Pound Sterling with respect to the Euro (GBPEUR). Up until the start of September, the Pound lost, on average, 2.14 percent each month. This staggering trend would have seen Sterling fall to a value of parity against the Euro as soon as December; one Pound would equal one Euro.

 

However, largely down to Bank of England action, the seemingly relentless bear trend abated, allowing the Pound to find a new support. Following a Bank of England policy change a couple of weeks ago, Sterling has entered into a comparable, if not more severe, downward spiral that would threaten to achieve parity by February. While markets may try, this doom and gloom appears overplayed.

 

 

 

 

Dollar Briefing: Ambivalence 

 

The US Dollar is braced for the release of industrial production data this afternoon in addition to November’s Philadelphia Fed survey and business outlook. The US Dollar appears to be facing dichotomous pressures that are each struggling for supremacy.

 

Yesterday saw the release of highly positive and salient inflation data, however, no such appreciation within the Dollar. Similarly, US retail sales performed well, however, failed to translate into Dollar strength. The non-conversion of positive data is likely due to the uncertain journey of the tax reform effort and thus, once again, politics matters.

 

 

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St Mary Axe view

Central Bank Speculation

Discussion and Analysis by Charles Porter:

 

The Euro has opened stronger yet again today, continuing its upward surge against the US Dollar. The single currency has gained in excess of 2% against the US Dollar within just one week. The correction following the European Central Bank’s Dovish tapering of quantitative easing now exceeds the original loss. The Pound opened relatively unchanged as markets await important labour market statistics released at 09:30. With wage growth suppressed, the status of the labour market is elevated. Overnight, Japanese GDP growth came in weaker than expected, however, was not reflected within the Yen.

 

 

 

Sterling Briefing: Central Bank Speculation

 

This week, the opportunity to understand the perspective of crucial central bankers is rife. Yesterday evening, speaking to the Oxford Economic Society, Bank of England (BoE) Deputy Governor Sir Jon Cunliffe spoke about the Phillips curve; the relationship between the rates of unemployment and inflation.

Being an arch Dove of the BoE, one of only two members that rebelled against the dominant Committee decision to raise the Bank Rate by 25 basis points at their last meeting, Sir Cunliffe could not resist expounding his view on monetary policy.

The Deputy Governor explained that domestic inflationary pressure, particularly wage growth, was too subdued to raise interest rates. Therefore, despite above target overall inflation, the domestic economy itself is not overheating. This view dictates that, should wage inflation pick up, this Committee member would be willing to raise interest rates, likely providing strength to the value of the Pound. This revelation makes the labour market more important than otherwise.

This afternoon, SGM-FX heads to the London School of Economics to bring you live updates as Deputy Governor Ben Broadbent speaks on Monetary Policy and Brexit.

 

 

 

Euro Briefing: European Bull

 

The Euro has gained considerable ground against both the US Dollar and the Pound Sterling this week. Yesterday, the Euro gained in excess of 1% from market open to market close. The data-heavy episode that markets experienced yesterday, and which continues today, supported the Euro with each release coming in at unremarkable but strong levels.

In particular, the economic growth figures as measured by GDP were strong within the Eurozone, Germany and Italy. Similarly, ‘soft’ data, that measures sentiment and the present economic situation and outlook based upon survey results, performed strongly.

 

 

 

Dollar Briefing: Inflation

 

As Janet Yellen continues to eye a December rate hike, this afternoon will provide a critical piece of the puzzle in the form of inflation data. The significant tick-up in inflation last month was largely down to a spill over into oil and energy prices from the spate of devastating hurricanes that the continent experienced.

Core inflation is more likely to provide a transparent and tangible reading of economic price inflation and thus dictate the expectations surrounding monetary policy. Therefore, at 1:30pm today, markets will turn towards the US to examine the inflation report.

 

 

 

The Days Ahead:

 

Overnight, global political uncertainty increased with events in Zimbabwe. The currency exposure of Zimbabwe is negligible, operating through currency pegs and frequently adopting the US Dollar outright. Following our coverage of BoE Deputy Governor Ben Broadbent this afternoon, tomorrow will see the Bank’s Governor and most of the MPC convene in Liverpool, in an event that contains the propensity to provide considerable volatility within the Pound Sterling.

 

 

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Global Data Returns

Discussion and Analysis by Charles Porter:

 

The return of data today could see an increase in volatility within many major currencies. The reading of Germany’s third quarter GDP has already provided support to the Euro, with UK inflation data also due this morning. The Pound has carried over the weakness that it incurred during the pricing in of domestic political risk. There was no indication of concern from Theresa May last night as she spoke at the Lord Mayor’s Banquet, leaving Sterling largely unchanged. Instead, a focus on a global Britain and foreign policy gave markets no clearer insight into the significance of the threat from a vote of no confidence.

 

 

 

Sterling Briefing: Economics vs. Politics

 

The return of economic data has arrived with inflation data for the United Kingdom being released in the form of the Consumer Price Index (CPI). The CPI can create interesting dynamics for a currency, with inflation usually signalling an increase in the probability of a monetary policy tightening that markets would reward with value. However, in the abnormal policy times that we currently live in, the forward guidance of the Bank of England seems so Dovish that inflation is unlikely to trigger monetary policy alarm bells. Given that inflation is widely expected to flirt with the 3% target, an open letter from Governor Carney to the UK Chancellor could be highly informative.

 

Whatever the Sterling dynamics that the inflation report creates, the effect will be moderated against the significant weakness (approximately 1%) that domestic political instability has created.

 

 

 

Euro Briefing: Economic Growth

 

Germany’s economic growth, as measured by quarter-on-quarter growth in Gross Domestic Product, ticked up from 0.6% in quarter two, to 0.8% in quarter three. The simultaneous reading of CPI inflation data within the Eurozone’s most systemically significant economy remained sluggish and short of the ‘just under 2%’ target. As an export-led economy, the composition of economic growth was particularly important within this publication, showing strong export, outward-facing, growth.

 

Growth within the German economy appears to have provided a mild tailwind to the Euro this morning, as it continues its weekly climb against the US Dollar. Later this morning, further Eurozone data is due including the ZEW sentiment survey. Meanwhile, ECB President Draghi will speak alongside other central bank leaders in Frankfurt.

 

 

 

Dollar Analysis: Well Behaved Markets

 

Over the past week, the currency cross between the Euro and the US Dollar has been rather tame. The Euro is attempting to correct its value following a monetary policy-led devaluation and is being offered ground by the US Dollar due to the apparent challenges to Trump’s Tax Reform. This morning, the boost from Eurozone economic growth statistics strengthened this trend.

 

 

 

 

The Days Ahead:

 

Today’s return of economic data is a trend that is set to continue throughout the week, with UK labour market statics due tomorrow before US inflation data is published. With the Federal Reserve Bank in the US widely expected to raise interest rates again in December, tomorrow’s CPI reading will be important.

 

In the US, the inflation-exchange rate relationship operating through monetary policy expectations is more likely to hold. Therefore, an inflation report that allows the FOMC to hike the interest rate target will be positive for the US Dollar.

 

 

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Low Sterling Confidence

Discussion and Analysis by Charles Porter:

 

A couple of months ago, the cloud looming over the United Kingdom’s political economy appeared to have receded, if only to show a lighter shade of grey. Following Theresa May’s Florence speech and the warm reception that it received from European officials, the Pound Sterling received a highly illusive tailwind. However, following a ‘dovish’ Bank of England hike in the interest rate and an unstable domestic polity, confidence in the Pound Sterling has once again dropped. Opening around 1% weaker against the US Dollar this morning, the threat of a vote of no confidence in Theresa May’s leadership held the Pound behind.

 

The Sunday Times reported yesterday that as many as 40 British MPs had agreed to sign a letter signalling their discontent in Theresa May, threatening to culminate in a vote of no confidence. Should the vote manifest and dissatisfaction with May’s leadership grow within the Commons, then the UK’s political bedrock would be brought into tumult. Politics truly matters when it comes to financial markets and exchange rates because the political system not only determines the regulatory backdrop of the economy but also, to a significant extent, determines its stability and prosperity.

 

The British Parliamentary system implies that should Theresa May face a vote of no confidence, it is highly likely that the opposing party would enter power. This is because a successful vote would trigger a General Election where the opposition party currently holds higher public opinion than the incumbent. A Labour government under the leadership of Jeremy Corbyn MP has been framed as highly unfavourable to both the budget deficit and Brexit progress.

 

Evaluating the accuracy of this claim requires personal political preferences to be suspended. The facts would suggest that the policy preferences of Corbyn and the Labour Party would require greater government spending and, in the face of highly static budgetary revenues, would be particularly likely to add to a significant deficit and level of borrowing.

 

Moreover, upon the triggering of Article 50 in March of this year, the incumbent government has nurtured its position on Brexit and made considerable developments in the negotiations. Despite the arguable lack of success within the 6 rounds of negotiation to date, it is inconceivable that at least the slightest headway has not been made.

 

Negotiating the UK’s Secession from the European Union is arguably one of, if not the, most important political responsibilities that the UK will face for a long time. It should not be forgotten that the Secretary of State for Exiting the European Union is a politically accountable and elected MP; David Davis. Therefore, unlike a technocratic and independent institution, a leadership election that turns into yet another General Election could well result in the replacement of Davis.

 

Moreover, given the propensity for an opposing party to dig up and dispose of the current foundations that negotiations have produced, a vote of no confidence is sure to take up considerable time in what is already an incredibly finite period of two years under the Lisbon Treaty.

 

The salience of a vote of no confidence should therefore not be understated. Although I do not expect the message to be heeded, politics should not be something that Westminster jokes around with right now. So how credible or necessary is the vote of no confidence in Theresa May? Well, the instability within her Cabinet has been significant. The low standing status of some pivotal members that still remain, namely Foreign Secretary Boris Johnson and First Secretary of State Damian Green, is highly troublesome for any longevity in May’s leadership. On top of this, two senior cabinet ministers, Priti Patel and Sir Michael Fallon, have faced such pressure as to resign in recent weeks.

 

It is unsurprising, therefore, that the Pound reacted violently to the weekend’s news. At times today, the Pound lost in excess of 1% against the US Dollar, with a slightly weaker Euro moderating the losses within the EURGBP currency cross. Throughout the afternoon, because the situation did not mature greatly, the Pound gained some of this ground back, at times, to the order of 50%. In a data-heavy week, the Pound still appears most vulnerable to politics, even in the face of CPI inflation on Tuesday.

 

 

Theresa May will be speaking at the Lord Mayor’s Banquet this evening. Her comments there will be an opportunity to gauge how she will handle the threat that exists to her leadership. Ridding the political instability that has plagued the Pound amidst Brexit will be critical to achieving value within Sterling markets once again.

 

 

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Start to the Week

Discussion and Analysis by Charles Porter:

 

The Pound Sterling dominates the story in foreign exchange markets following the weekend. The potential to induce vote of no confidence in May’s leadership was claimed to be in excess of 80%, with 40, out of a necessary 48, MPs said to have signed their name in support of a vote. Following the news, published in the Sunday Times, the Pound Sterling trades approximately 1% weaker than Friday’s market close. Moreover, following an apparently stagnant 6th round of Brexit negotiations last week, the Pound faces pressure. Elsewhere, entering into a data-heavy week, major currencies are relatively unmoved.

 

 

 

Sterling Briefing: No Confidence

 

As the confidence of Conservative party members in their party leader and Prime Minister, Theresa May, falls, so too does investors’ confidence in the Pound Sterling. The Pound has opened weaker by around 1% against the US Dollar and, moderated by a mildly weaker Euro, by approximately 0.6% against the single currency.

 

The potential for a vote of no confidence and change of leadership was published in yesterday’s Sunday Times. Whilst the extent of the challenge remains obscure, and the complexion of rebelling MPs remains unclear, the threat does follow a tumultuous time within the UK cabinet, and stumbling Brexit negotiations. After the Pound and the Prime Minister received a boost from the European reaction to the Florence speech, any further political risk within the United Kingdom will be severely negative for the Pound. Hard economic data, including the rate of inflation and unemployment statistics, are due to be published this week. However, these could prove to have a weaker effect upon the value of Sterling than domestic politics this week.

 

The weakness of the Pound this morning, shown against the Euro and Dollar below, reflects the pricing-in of instability within the UK polity.

 

 

 

 

 

Euro Briefing: The Battle Continues

 

The most notable recent event that has determined the value of the Euro caused a shock devaluation on the 26th October. The devaluation of the single currency was caused by a ’dovish’ tapering of Eurozone quantitative easing, sending the Euro down by more than 1.5%.

 

Following the monetary policy decision that sent the Euro into new ground, it has been battling with the US Dollar to correct back to pre-decision levels. Whilst the Pound Sterling has been embroiled with Brexit negotiations and the UK’s domestic politics, the Euro-Dollar currency cross proves interesting. Any consolidation within the Euro following the devaluation has been weak, with the Euro presently trading just shy of 1.5% weaker against its pre-decision value. Following the weekend, the Euro has opened weaker as we wait to see whether the Euro’s fight-back has run out of steam.

 

 

 

Dollar Briefing: Trump’s Tour Concludes

 

Currency markets have come to understand and expect the volatility of a Trump presidency. Therefore, following a potential increase in global political risk whilst the leaders of the United States and North Korea exchanged insults over Twitter, the Dollar remained relatively stable.

 

As Trump’s tour draws to a close, any news of positive and above-expectation trade deals will be positive for associated equities and the US Dollar. Should political relationships have been fostered that might facilitate a peaceful resolution to the threats centered around the Korean Peninsula, the Dollar would also receive a boost.

 

 

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SGM-FX View of london

Brexit Means…

Discussion and Analysis by Charles Porter:

 

The overwhelming dynamic of the week thus far has been one of relative tranquillity within Foreign Exchange markets. However, today’s events bring the propensity to blow this perception out of the water by providing considerable volatility to markets. Sterling has opened mildly stronger having faced headwinds during yesterday’s session. A Brexit press conference between David Davis and Michel Barnier is due later today, detailing the progress achieved within this round of negotiations. The all-important Irish border is being signposted to have created an issue during this round.

 

 

Sterling Briefing: Brexit Means…?

 

Brexit means… Brexit? Breakfast? Following the referendum on 23rd June 2016, the public have been told of a Black and White Brexit; a Red, White and Blue Brexit; a hard Brexit; a soft Brexit. Well, this morning, the Liberal Democrat vision of a no-Brexit has gained momentum.

 

One of the authors of the Lisbon treaty’s Article 50, Lord Kerr, is expected to advocate that there is a legal basis for the retraction of Britain’s notification of withdrawal. Speaking in London today, John Kerr will stand in contrast to the government’s headline negotiating stance: no deal is better than a bad deal. What will be important for Sterling markets is the disharmony that this testimony may create within May’s deeply divided Cabinet.

 

The headline within the Financial Times this morning suggests that PM Theresa May could be willing to offer more than the €20bn payment that was implied by her Florence Speech. Hardline Brexiteers within her own party are said to be more willing to pay a higher price for a better deal, relieving a constraint upon May’s cabinet.

 

 

 

Catalonia:

 

The Catalan referendum only a short while ago provided panic to markets. The Euro insulated itself considerably from the trouble in virtue of being the face of a currency union, and therefore not feeling the traditional idiosyncrasies of national currencies. However, Spanish and Catalonian debt markets, both corporate and private, were brought into a state of disarray alongside Catalonian private entities.

 

Following the referendum and declaration of intent, political risk soared within Spain. As Madrid and Prime Minister Mariano Rajoy waded into the independence bid, the status of Catalonia’s autonomy from the capital was threatened. However, at present, markets appears to have forgotten the crisis that unfolded in Spain. Whilst momentum appeared to sway back and forth within the Catalonian electorate, with immense rallies for both sides of the campaign seemingly out-doing the other, tension must still exist.

 

The tension that still underlies the region and its relationship with the rest of Spain should not be forgotten so easily, particularly with the daily reminder of Brexit. Markets could soon underprice the political risk within Spain and the wider Eurozone, and those exposed to forex markets would be well advised to remember this risk.

 

 

 

Tax Hurdles:

 

Yesterday afternoon, markets appeared to price in a risk to Trump’s pro-Business Tax reform. The Trump Presidency, beginning even from his election, has provided a tailwind to the US Dollar. With the Bill now in the Senate and facing significant challenges and manipulation, the US Dollar has come under pressure. Losing ground to the Euro most days this week, markets appear to be testing recent Euro weakness.

 

 

 

The Days Ahead:

 

Trade balance, industrial, manufacturing and construction data is out later this morning. Containing the propensity to provide mild support to the Pound, Sterling markets will look here before attempting to gleam any information from the interaction between Barnier and Davis. With inflation data out next week, we look ahead to the weekend.

 

 

 

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