Daily Forex Commentary

03 January 2018 - GBP/USD hits highest level since the day after the EU referendum in June 2016. USD still struggling around 14-week lows.

By Nick Parsons

Wednesday 3 January



British Pound (GBP)

The pound got off to a very good start to the New Year 2018 yesterday, second only to the buoyant Canadian Dollar on the one-day performance table. Against a very weak US Dollar it reached an intra-day high of 1.3594 which matched its high for 2017 reached back in mid-September. Overnight in Asia it has extended its gains further to reach USD1.3608; its highest since the day after the EU referendum back in June 2016. This impressive price action comes against a backdrop of a slightly softer than expected manufacturing PMI report which printed at 56.3 in December; well down from November’s 51-month high of 58.2. Although December saw rates of expansion in output, new orders and employment slow from November’s highs, growth in all three components remained solid and well above long-run trends. And, despite the uncertainties of Brexit, the headline PMI has now remained above the 50.0 no-change mark for 17 consecutive months. On the inflation front – which will be crucial for the Bank of England’s Monetary Policy Committee in 2018 – Markit reported the rate of increase in input costs eased to a 4-month low in December, but remained marked overall. Companies linked higher costs to rising raw material prices, input shortages, suppliers raising their prices and the exchange rate. The cost of chemicals, electrical goods, electronics, metals, paper, plastics, timber and utilities were all reported as higher. Part of the increase in purchase prices was passed on in the form of higher output charges in December. Selling prices rose for the twentieth successive month with companies linking the latest increase in charges to stronger demand. Ahead of the construction PMI today and the service sector PMI index on Thursday, the GBP opens in Europe this morning at USD1.3600 with GBP/AUD at 1.7395 and GBP/NZD1.9170.



US Dollar (USD)

USD/GBP expected range: 1.3500 – 1.3650

The US Dollar remains friendless and after two weeks of near-relentless losses into year-end, it has kicked off 2018 with further losses. Its index against a basket of major currencies opened yesterday around 91.90 and fell all the way to 91.44 by mid-morning in Europe before rallying very slightly to close in New York around 91.52. This is barely half a point above the 2017 low back on September 5th. Once again, the USD weakness came despite a rally in the stock market which saw the S+P 500 and NASDAQ indices make fresh intra-day and closing record highs and the NASDAQ close above 7,000 for the first time in history. It also comes despite higher bond yields at all points along the maturity spectrum and a very solid set of economic data. Markit’s version of the manufacturing PMI index rose from 53.9 in November to 55.1 last month. They noted that the latest upturn was supported by faster increases in output and new orders, amid reports of greater client demand. In line with stronger production growth, employment rose further and at the fastest pace since September 2014. Backlogs meanwhile increased at the quickest rate since October 2015 to indicate ongoing capacity pressures. Supply chain delays and increased global demand for inputs pushed costs up further, with the rate of cost inflation remaining sharp overall. The latest index reading was the highest since March 2015 and “signaled a solid improvement in the health of the sector”. For the moment, it seems just that the dollar is falling because it is falling. The technical tail is wagging the fundamental dog. When price action itself is such a dominant feature of trading, investors seek confirmation of the prevailing trend by seeking out the bits of news which support a continuation of the move rather than viewing the incoming information more objectively. Of course, we’ve been here before and a year ago it happened in precisely the opposite direction. All the news was interpreted as dollar bullish post the 2016 Presidential elections and it rose until January 3rd last year. Here we are on that same date, with sentiment arguably as bearish today as it was bullish then… The US Dollar index opens in Europe this morning at a close to 14-week low of 91.50. This afternoon brings the ISM manufacturing PMI report and then the Minutes of the December FOMC meeting at which rates were hiked 25bp.



European Euro (EUR)

GBP/EUR expected range: 1.1225 – 1.1320

After a year in which the euro was the best performing of all the major currencies, it got off to a flying start in 2018; with a high in Europe yesterday morning of 1.2077; the highest in over 3 years. It couldn’t sustain its very positive momentum throughout the day, however, and finished in New York around 20 pips below its best level. Certainly, there was nothing wrong with the economic data. Final December PMI’s for Germany, France and the Eurozone were released alongside all the individual countries which don’t produce ‘flash’ PMI’s around 10 days before the end of the month. Strong rates of expansion in output, new orders and employment pushed the final IHS Markit Eurozone Manufacturing PMI® to 60.6 in December, its best level since the survey began in mid-1997. The PMI was up from 60.1 in November and identical to the earlier flash estimate. National data signalled further broad-based growth, with business conditions improving across all of the countries covered. PMI readings were at survey record highs in Austria, Germany and Ireland, and remained close to November’s series peak in the Netherlands. Rates of expansion in France and Greece were the fastest for over 17 and nine years respectively. Growth also remained robust, albeit slower, in Italy and Spain. On this second trading day of 2018, the EUR opens in Europe at USD1.2050 and GBP/EUR1.1285. Germany’s December unemployment figures are published this morning but otherwise, it’s a quiet day for economic data ahead of tomorrows PMI services reports.

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