Daily Forex Commentary

02 January 2018 - US Dollar at a 14-week low. GBP and EUR to take their early 2018 cues from today’s manufacturing PMI data

By Nick Parsons

Tuesday 2 January



British Pound (GBP)

Whilst most people were off work but struggling with ever more inventive ways to eat turkey, the global foreign exchange markets were open for business from Boxing Day onwards. The British Pound had a good week against a very soft US Dollar but was otherwise pretty mixed and overnight it has continued in the same vein; down against every major currency except the USD with losses ranging up to half a cent against the CAD, AUD and NZD. The outlook for the British Pound over the next year has rarely been so polarized. On the one hand is a view that a 2-year transitional deal on Brexit can be relatively swiftly concluded which would see the UK adopt the policies and rules of the EU from the formal date of leaving in March 2019 out to March 2021. This, it is argued, would be the best – or least bad – outcome for British business and allow more time to plan for a post-Brexit world of new trade and customs arrangements with the European Union. Under this scenario, it is further argued that the GBP can regain most of its post-referendum losses and see GBP/USD return to $1.50 with GBP/EUR closer to 1.20 than 1.10. On the other hand is a view that the EU has little incentive to agree either a favourable or an early trade deal for the UK. Playing tough would reduce the attractions for other nations of leaving the EU whilst benefitting from the powerful cyclical economic upswing within the Eurozone. Under this scenario, it is argued that hard-line anti-EU Conservative MP’s would refuse to back a ‘shadow EU’ arrangement and would instead split the party and force a General Election on the issue. Whatever the anti-Brexit equivocations of the Labour Party, it is feared that a change of government would see the pound plunge to its post-referendum lows below USD1.20 and EUR1.10. It is against this highly uncertain political background that the first economic data of the New Year are released this Tuesday morning. Consensus expectations are for the December manufacturing PMI index to slip back from 58.2 to 58.0 The GBP opens in Europe this morning at USD1.3525 with GBP/AUD at 1.7250 and GBP/NZD1.8975. Exactly one year ago, on the first trading day of 2017, it stood at USD1.23, GBP/AUD1.71 and GBP/NZD1.77.



US Dollar (USD)

USD/GBP expected range: 1.3430 – 1.3580

After a very poor pre-Christmas week, the US Dollar then did even worse into year-end. Its index against a basket of major currencies fell to a 14-week low of just 91.77 before rallying slightly to end the year at 91.91. This meant that for the calendar year 2017, the USD fell almost 9%; the first annual decline since 2012. The US Dollar’s fall came despite the stock market recording more than 70 fresh all-time highs during the year and three hikes in interest rates from the Federal Reserve Bank. Donald Trump is still President of the United States, a historic tax reform bill has been passed and the money markets are pricing further interest rate hikes next year. Overnight Fed Funds Futures are pricing in a 95.2% probability of a hike by December 2018, with a 37.1% expectation for rates to be between 1.75 and 2% and 25.8% expectation for rates to be between 2 and 2.5%. For the next ‘live’ FOMC meeting in March, money market pricing reflects a 54% probability of a 25bp hike to 150-175bp. For the last week, none of these potential US Dollar positives seemed to matter and after the first Asia session of 2018, the USD is back testing last week’s lows. Remember, though, that in 2017 - against a background of near-universal bullishness on the USD - its index peaked on January 3rd at 103.3 and it was downhill almost all the way from there. USD sentiment may not yet be at historically bearish extremes, but it is certainly very depressed. Will the US Dollar spring a surprise in the opposite direction this time around or will its losses continue? The US Dollar index opens in Europe this morning at a 14-week low of 91.75. The 2017 low was 91.00 on September 5th…



European Euro (EUR)

GBP/EUR expected range: 1.1240 – 1.1305

In the short week of trading after Christmas, the Single European Currency strengthened steadily with the move accelerating to reach a best level on Friday of USD1.2025; its highest since September 10th. Taking the year as a whole, the euro was the best performing major currency in 2017. In early January as worries grew about upcoming elections in the Netherlands, Austria and France and the rise of populist anti-EU parties, there were concerns about a true existential crisis for the currency. EUR/USD hit a low point for 2017 of just 1.0341. With the resounding victory for Emmanuel Macron in the French Presidential Elections, it seemed, instead, that the Franco-German axis at the centre of EU politics for two generations would be strengthened and reinforced. The euro has subsequently shrugged off a poor election outcome for German Chancellor Angela Merkel and the dissolution of the Italian Parliament ahead of elections to be held in early March 2018. The economic recovery has gained traction across the whole of the EU and though inflation has not yet followed, it surely will if recent increases in energy prices are sustained. Whilst much of the good news for the euro may already be ‘in the price’, its positive momentum and excellent economic growth story leave it well poised to extend recent gains in the first part of 2018. Its first test will come later this morning when December’s final PMI manufacturing figures are released for all the Eurozone countries. On this first trading day of 2018, the EUR opens in Europe at USD1.2025 and GBP/EUR1.1245. One year ago, it began 2017 at USD1.05 and GBP/EUR1.17.

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