Daily Forex Commentary

27 December 2017 - USD falls to a 3-week low. AUD and NZD at best levels in over 2 months. GBP little changed after Christmas holidays

By Nick Parsons

Wednesday 27 December



British Pound (GBP)

Foreign exchange markets were open on Christmas Day in Asia and on Boxing Day in North America too. Having closed last week around USD1.3365, the British Pound initially fell to the low 1.3350’s at the start of Tuesday’s New York session before rallying up to a high of 1.3387. It ended the day at 1.3375 and has been stuck around this level throughout the overnight session in Asia. The latest revisions to the whole of the GDP data series last week served only to polarise opinion about the state of the UK economy. Upward revisions to Q4 2016 meant that in the calendar year which included the EU referendum, the UK economy was the joint fastest-growing in G7; its 1.9% rate was the same as Germany, above the US & Canada (both 1.5%) and well ahead of France’s 1.1%. The revised numbers also meant that the latest y/y growth of 1.7% in the year to September 2017 was better than the 1.5% which had been expected. Unfortunately, the revisions also raise the starting point for the next set of quarterly data, meaning we could see a sharp slowdown in the annual rate of growth when the Q4 numbers are published at the end of January. In the shouty echo chambers of social media, both sides in the Remain/Leave argument sought vindication in the GDP numbers. In the eyes of the foreign exchange market, the figures supported the view that the best of the UK’s post-referendum performance might now lie behind it and the early part of 2018 could well be more challenging. The GBP opens this Wednesday morning in Europe at USD1.3380 with GBP/EUR at 1.1265 and GBP/AUD at 1.7270.



US Dollar (USD)

USD/GBP expected range: 1.3350 – 1.3455

The Dollar had a poor pre-Christmas week despite further record highs for the stock market, a rise in market interest rates at all points of the maturity spectrum and generally solid incoming economic data. As a reminder, its index against a basket of major currencies opened last Monday morning at 93.50 which proved to be the high of the week; it subsequently fell almost without interruption to end on Friday around 92.85. Financial markets remained open in the world’s non-Christian centres on December 25th, with Tokyo and Shanghai the two major markets, albeit volumes were not high. In China the renminbi jumped to USD/CNY6.5514; the strongest since mid-September though the US Dollar was little changed against other major currencies. Yesterday, as the United States returned to work, the US Dollar index opened around 92.80 and rose to 92.92 before then trading down to a 3-week low of 92.73. Overnight it has weakened further to just 92.66; it’s lowest level since December 4th. There were some US economic statistics released yesterday. The 20-city house price numbers published by S&P/CoreLogic showed the annual rate of growth around 6.2%, though 16 of 20 major U.S. cities experienced home price growth of 5% or higher: double the pace of average wage growth. Seattle prices rose almost 12.5% in the year to October whilst Las Vegas grew 10.2%. Later today, we’ll have consumer confidence, then the advance goods trade balance, weekly jobless claims and Chicago NAPM on Thursday. The US Dollar index opens in Europe this morning at 92.70.



European Euro (EUR)

GBP/EUR expected range: 1.1250 – 1.1310

Five days have now passed since the elections in Catalonia and it is still not clear who will form a regional coalition there, let alone what relations will be with the rest of the country. Although Spanish Prime Minister Rajoy''s conservative Popular Party (PP) had a disastrous election, winning just three of the 135 seats, he will for the moment keep control of the region, because he imposed direct rule in October, invoking Article 155 of the constitution. That extraordinary measure was a first in post-Franco Spain and though it was said to be “temporary”, no end date has yet been announced for the current situation. The European Union has treated the matter as an internal affair for Spain to resolve and is highly unlikely to change its stance. Meantime, the Catalan economy has suffered. Thousands of businesses, including major banks and energy firms, have moved their headquarters out of the region and, as it accounts for around 19% of Spanish GDP, the economic uncertainty is weighing down on activity. The OECD, for example, now forecasts GDP growth of just 2.3% in 2018 after 3.0% in 2017. The ECB publishes its monthly Economic Bulletin tomorrow and it will be interesting to see how much weight, if any, it places on developments in Spain. The country accounts for only 11% of Eurozone GDP and is the fourth largest country after Germany, France and Italy. Having swung between USD1.1816 and 1.1877 yesterday in the North American session, the EUR has been generally well-bid overnight in Asia. EUR/USD has risen to a high of 1.1885 - its best level since last Thursday morning - and the Single European Currency has kept pace with the Australian Dollar which has been the best performer overnight. The euro opens in London this morning at USD1.1885, with GBP/EUR at 1.1265.

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