Daily Forex Commentary

18 December 2017 - GBP and EUR both mixed at the European open.

By Nick Parsons

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Majors:

Data Releases:

The British Pound had a very volatile but ultimately pretty poor week. It began last Monday at USD 1.3385 but was weighed down by concerns over whether Conservative MP’s would accept the deal agreed in Brussels the previous Friday by UK Prime Minister Theresa May. Tuesday’s CPI switched the focus to falling real incomes whilst Wednesday brought the Government’s first Parliamentary defeat on Brexit. Thursday saw the Bank of England leave interest rates unchanged and after a steady start Friday, the pound plunged late afternoon as the US appeared close to agreeing tax reform and a surging equity market lifted the Dollar. The GBP ended the week as the worst performer amongst all the major currencies.This morning, (542 days after the referendum) a UK government subcommittee is going to hold talks on what kind of relationship Britain wants to have with the EU. This comes one day ahead of a full Cabinet meeting to decide what it wants from the negotiations. The Brexit secretary, David Davis, has suggested a “Canada plus plus plus” deal, broadly based on the EU’s trade deal with Ottawa, but covering services, including financial services, and allowing closer ties because the volume of trade covered is so much larger. Foreign Secretary Boris Johnson wrote yesterday in a newspaper article that, “What we need to do is something new and ambitious, which allows zero tariffs and frictionless trade but still gives us that important freedom to decide our own regulatory framework, our own laws and do things in a distinctive way in the future”. Whatever is decided on the UK side, the EU still holds all the aces in the Brexit negotiations. According to The Times, Michel Barnier, the lead EU Brexit negotiator, told Prospect magazine that “no way” could there be a bespoke trade deal that mixed those that applied to Canada and Norway. “There won’t be any cherry picking,” he said. A long time has passed since Foreign Secretary Boris Johnson’s confident claim that he was “pro-cake and pro-eating it”. After Friday’s very weak close in thin liquidity conditions, the GBP opens around a quarter of a cent higher in London this morning at USD1.3345. Against the EUR it is little changed at 1.1340 while against the Australian Dollar it is a quarter of a cent lower at 1.7405.

 

The Dollar had a very volatile week but its index against a basket of major currencies ended almost exactly where it had begun at 93.50. Record highs for the stock market brought the dollar’s high for the week on Tuesday at 93.81 before a Senate election defeat in Alabama questioned the President’s judgment and reduced the Republican majority in the Senate to just one seat. The USD turned lower and despite what looked to be a very non-controversial FOMC Statement and subsequent Press Conference, extended its decline in the last 2 hours of trading in New York, with the index falling to a 1-week low of 92.95.From the New York opening on Friday, however, stocks began to surge on news that the last Republican hold-out on tax reform was now going to offer his support after being offered some concessions on child care provisions. The S+P 500 index jumped a stunning 25 points to a fresh closing high, dragging the USD index up three-tenths to end a volatile week exactly where it had begun at 93.50. Overnight in Asia the US Dollar has slipped a little to 93.30. All eyes are on the passage through Senate of the tax reform bill. Vice President Mike Pence has delayed a trip to the Middle East as the Republican majority is so slim the party can’t afford even to have one Senator away…

 

The Euro had another generally disappointing week, failing to gain any upside traction even as incoming data continued to show the economic recovery in the Eurozone to be broadening and deepening. It opened in Asia last Monday morning at USD1.1765 but on Tuesday it fell to the week’s low of 1.1724 on Italian Press reports that parliamentary elections would be held on March 4th. Wednesday’s post-FOMC Dollar sell-off saw EUR/USD jump more than a cent, and on Thursday morning, it reached its best level of the week at 1.1843, helped by very strong purchasing managers surveys. At the ECB meeting, new staff economic projections showed upward revisions to growth forecasts although inflation projections for 2019 and 2020 were left unchanged at 1.5% and 1.7% respectively. The significance of the CPI forecasts is that on a 2-year horizon, inflation is not yet back at the ECB’s target of “close to but just below 2%”. This provides the justification for continuing the very accommodative monetary policy. By Friday’s close, the EUR had given up all of Thursday mornings gains and more; ending in New York at the session lows of USD1.1751 as the USD surged in a very illiquid market.In overnight trading in Asia this Monday morning, the EUR has gained around 20 pips to 1.1765 with GBP/EUR unchanged at 1.1337. Today brings the final Eurozone CPI numbers and the highlight of a fairly sparse economic data calendar will be Tuesday’s German ifo survey.

 

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