Daily Forex Commentary

21 December 2017 - GBP lower on more UK government woes. NZD jumps as Q3 GDP beats expectations. EUR awaits Catalonia elections.

By Nick Parsons

Thursday 21 December



British Pound (GBP)

This is the shortest day of the year in the Northern Hemisphere; a turning point in the calendar from where we can enjoy an extra two minutes of daylight every evening for the next 182 days. It all adds up: two minutes per day, a quarter of an hour per week and an hour per month. Short as the daylight is today, it may still feel like a long day in foreign exchange markets as currencies struggle to gain much traction in either direction. In an otherwise quiet Asian session, the pound as been weakest of all the majors as the Deputy Prime Minister Damien Green became the latest Ministerial resignation from Government. After Theresa May finished her last Question Time of the year in the House of Commons yesterday, the GBP was up at USD1.3410; this morning it is almost half a cent lower at 1.3360. The IMF yesterday released its annual report on the UK economy, with its Managing Director Christine Lagarde in London for a Press Conference. The IMF had been criticised 18 months ago for taking sides with former Chancellor George Osborne in the run-up to the EU referendum. Defending its forecasts, Ms Lagarde said that, “the Brexit referendum result and the decision to invoke Article 50 are already having an impact on the economy even though the UK is not planning to leave the EU until 2019. She added, “We feared that if Brexit was decided upon, it would most likely entail a depreciation of sterling, an increase in inflation, a squeezing in wages and a slowdown and a reduction of investment. What we are seeing is that that narrative we identified as a potential risk is being rolled out as we speak. It’s not experts talking, it’s the economy saying that. Our forecast is 1.6 per cent GDP growth this year and 1.5 next year, which relative to the upward revisions we are advocating for other advanced economies is a bit of a disappointment.” The IMF’s statement concluded, “Despite a strong recovery in global growth and supportive macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand. Business investment growth has been lower than would be expected in the context of strong global growth and high levels of capacity utilization, owing to heightened uncertainty about economic prospects.” With only UK government borrowing figures due for release today, the pound opens in Europe at USD1.3360 with GBP/AUD at 1.7445 and GBP/NZD at 1.9085.



US Dollar (USD)

USD/GBP expected range: 1.3310 – 1.3410

The Dollar fell steadily across time zones on Wednesday, unable to gather much support either from strong economic data (existing home sales), higher bond yields or a rallying stock market. By the end of the London afternoon its index against a basket of major currencies had fallen to 92.83; its weakest level for a fortnight. The fall came – and we are wary of inferring causality – as the 3-month cross-currency basis swap (the price of borrowing dollars) suddenly reversed the move of last week which had persistently weighed down on the EUR/USD exchange rate. US 10-year bond yields hit 2.48%; their highest since March, whilst their German equivalent hit only a 2-month high of 0.41% yesterday. The spread between the two of 207bp is the widest since Q2 but it does not seem yet to be a driving factor in currency markets. Nor, for the moment do 2-year US rates of 1.82%, even though their German counterparts still yield minus 70bp; a huge 2.52% yield advantage which the ECB is in absolutely no rush to reverse. For the day ahead in the US, there’s a bumper crop of economic data releases: The third estimate of Q3 GDP, weekly jobless claims, the Philly Fed index, the Chicago Fed index of national activity and then November’s leading economic indicator. The US Dollar index opens in Europe at 92.96.



European Euro (EUR)

GBP/EUR expected range: 1.1150 – 1.1320

The euro followed up on Tuesday’s rally with a second day at the top of the FX league table on Wednesday; all of its gain coming very late in the European day and in the New York morning. The absolute magnitude of the move was not great – a 40 pip rise from 1.1843 to 1.1885 but the market was so quiet generally that it was enough for the EUR to take top spot. The big event in Europe today is political rather than economic as the Spanish region of Catalonia goes to the polls. The election was called by the Spanish prime minister, Mariano Rajoy, at the end of October when the central government took control of Catalonia and sacked the regional government after it staged an illegal independence referendum and made a unilateral declaration of independence. The latest opinion polls suggest Catalonia is set for a hung parliament, with the pro-independence Catalan Republican Left party (ERC) vying for first place with the unionist, centre-right Citizens party. Article 155 of the Spanish constitution – which allowed Prime Minister Rajoy to sack the Catalan government and call elections – will remain in force until a new government has been agreed and a new regional president elected by the Catalan parliament. For the moment, and indeed for the forseeable future, no government in Europe is willing to support a Catalonian push for independence and the exiled leader of the secessionists, Carles Puigdemont, could well face arrest should he return from Belgium. With no economic data of any note today, the EUR opens in Europe this morning at USD1.1865 and GBP/EUR1.1265.

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