Daily Forex Commentary

20 December 2017 - Quiet overnight markets see currencies in familiar ranges. US passes tax reform bill, Australian statisticians have some festive fun

By Nick Parsons

Wednesday 20 December

British Pound (GBP)

The pound opens in London this morning within 10 pips of where it was 24 hours ago against the US Dollar. Twice yesterday it failed just short of 1.34 but having sold off during the afternoon to just 1.3337 – and at one point looking likely to be the weakest currency on the day - it rebounded quite smartly in the New York session. The UK Government yesterday held its first formal cabinet meeting to discuss its preferred end-state after the Brexit negotiations. A Downing Street spokesperson said the meeting was “good, clear and detailed” and that the Prime Minister hopes for a deal that “secures the best possible trading terms with the EU, allows the UK to set rules that are right for our situation and facilitates ambitious third-country trade deals”. According to this source, 25 ministers spoke at the final cabinet meeting of the year, which lasted an hour and 25 minutes, making a range of contributions that Downing Street said were not restricted to their specific briefs. A quick calculation shows they averaged a little over three minutes each; barely enough time to make an argument and probably not enough to start one with each other. The meeting, of course, was hailed as a success. “As we have said throughout, we are confident of negotiating a good deal for financial services and, as we have always been clear, that will be in the EU’s interest as well as ours,” the spokesman said. With no economic data scheduled for release in the UK today, we have at lunchtime the very last Prime Ministers’ Questions of the year at midday. It will be interesting to see whether the Opposition can effectively attack the Government or whether the spotlight will instead fall on its own internal contradictions on Brexit. Ahead of that, the pound opens in Europe at USD1.3390with GBP/AUD at 1.7475 and GBP/NZD at 1.9235.

US Dollar (USD)

USD/GBP expected range: 1.3335 – 1.3445

The Dollar had a roller-coaster day on Tuesday after Monday’s difficult to explain drop. We reminded readers seeking to understand its decline of the wise words of Janet Yellen that “correlation does not imply causality”. It was certainly interesting to do a Google search on Monday evening and look at the multiple versions of “US Dollar drops as….”. Having opened in Sydney at 93.25 yesterday, the USD’s index against a basket of major currencies fell to 93.07 but rallied in the European afternoon to 93.20; not quite reversing all the decline but with a steadier tone nonetheless. Its’ rally came as US bond yields rose above their recent trading ranges with 10-year Treasuries up at 2.45% from 2.38% on Monday. From 4pm London time, however, and even as US bond yields sustained their earlier climb, the USD turned lower once more and closed with its index at the day’s low of 93.04. Overnight, the US Senate approved the $1.5 trillion tax bill, which includes permanent tax breaks for corporations and temporary tax cuts for individuals, by a final vote of 51-48. Once enacted, the legislation will represent the most drastic changes to the US tax code since 1986. The bill lowers the top individual tax rate from 39.6% to 37% and slashes the corporate tax rate to 21%, a dramatic fall from its current rate of 35%. Speaking at a Press Conference after the vote, Senate majority leader Mitch McConnell hit back against criticism that the tax overhaul was unpopular among the public. “If we can’t sell this to the American people, we ought to go into another line of work.” Let’s see if this line comes back to haunt him at some point in the future. For this Wednesday morning, the US Dollar index opens in Europe at 93.05. There’s not much on today’s US economic calendar though existing home sales are expected to have risen 0.9% m/m to an annualized pace of 5.52m.

European Euro (EUR)

GBP/EUR expected range: 1.1285 – 1.1365

The euro had a very good day on Tuesday, rising back on to a US 1.18 big figure at the end of the Sydney session and staying on it for pretty much the whole day It hit a best level of 1.1829 in the European time zone; the same as Monday’s high. By the end of the day, however, and as the US Dollar weakened, it went on to hit a high of 1.1846 and finished as the strongest of the major currencies. Having stubbornly refused to take any encouragement from last week’s crop of positive data, the release of the German ifo Survey this time did provide some support. According to the ifo Press release which was unusually full of seasonal cheer, “Sentiment among German businesses is excellent ahead of Christmas, but no longer quite as euphoric as last month. The ifo Business Climate Index edged downwards to 117.2 points in December from 117.6 (Seasonally adjusted) points in November. This was due to less optimistic business expectations. Assessments of the current business situation, by contrast, were more positive this month. German businesses are full of festive spirits. In manufacturing the index dipped down from its record high. Manufacturers are no longer quite as optimistic about the months ahead. However, they are more positive about their current business situation, primarily due to an upturn in orders. Both indices close the year way above their long-term average. Manufacturers expect prices to continue to increase”. The EUR opens in Europe this morning at USD1.1835 and GBP/EUR1.1310. German PPI and Eurozone PPI data due today are very unlikely to be market moving data points.

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