Daily Forex Commentary
09 January 2018 - USD hits best level of the New Year. EUR weighed by German politics, GBP calm after govt reshuffle.
By Nick Parsons
Tuesday 9 January
British Pound (GBP)
After a mixed week in which it raced up to a high of USD1.3608, then came back down equally rapidly to 1.3500 before finishing on Friday evening at USD1.3565, the GBP had another up and down day on Monday. Talk of an imminent Cabinet reshuffle by Prime Minister Theresa May initially pulled the rug from under the pound during the European morning and GBP/USD reached a low of 1.3528. In fact, the Government reshuffle proved to be much less far reaching than most commentators had either hoped or feared. There were no changes in any of the three big jobs - Chancellor of the Exchequer, Foreign Secretary or Home Secretary – but plenty of movement lower down the pecking order; the immediate impact of which was not particularly obvious. But, to the extent that it didn’t increase the chances of rebellion or mutiny, investors nerves were somewhat soothed by the lack of major changes. The pound regained its morning losses by the end of the European afternoon and stood where it had begun at 1.3560. This morning, as the reshuffle is examined more closely, the consensus amongst political pundits is that it exposed the weakness of the Prime Minister and laid bare the few options open to her. The Times notes, “An event that could have been used to clarify the direction of the government after a difficult few months served only to highlight the incoherence at Number Ten” whilst the Daily Telegraph, calling it the night of the blunt stiletto, says “Theresa May’s hopes of asserting her authority with a Cabinet revamp fell flat after senior ministers derailed her reshuffle by refusing to budge from their jobs”. It will be interesting to see whether the foreign exchange market’s reaction yesterday afternoon proves correct or is now reversed. Meantime, the GBP opens in Europe this morning at USD1.3570 with GBP/AUD at 1.7285 and GBP/NZD1.8885.
US Dollar (USD)
USD/GBP expected range: 1.3500 – 1.3610
There are two ways of looking at the Dollar’s performance in this early part of the New Year: the bearish view is that with all the good news on the economy, the stock market and a rising trend of yields across the maturity spectrum, it still couldn’t rally and made a fresh 14-week low last week of 91.44 on its index against a basket of major currencies. The bullish view is that for all the growing political storm around President Trump, a disappointing labour market report and a stream of negative forecasts for it from major financial institutions, it is up off the lows with some recent positive momentum. It will obviously take some time to see which of these views proves correct though, in the very short-term at least, the bulls can take some comfort from Monday’s price action. At 91.56, the low of the Sydney session was above Friday’s 91.50 low and from that point it moved steadily higher to make it back on to a 92 ‘big figure’ for the first time in more than a week. The Dollar’s rise on Monday came despite a generally very dovish speech on the US economy from Federal Reserve Bank of Atlanta President Raphael Bostic. He urged his colleagues to be patient in raising interest rates, citing some indications that the public’s expectations on inflation could slip below the central bank’s 2 percent target. He said, “I am comfortable continuing with a slow removal of policy accommodation. However, I would caution that that doesn’t necessarily mean as many as three or four moves per year.” Overnight in Asia, the USD has slipped around one-tenth from Monday’s close and its index against a basket of major currencies opens in Europe this morning around 91.95.
European Euro (EUR)
GBP/EUR expected range: 1.1280 – 1.1410
The EUR had a poor day on Monday, slumping to the bottom of the one-day performance table despite further upbeat survey indicators. The day brought a better than expected consumer confidence index of 116 (f/c 114.8) industrial sentiment of 9.1 (f/c 8.4) and business climate of 1.7 (f/c 1.51). For good measure, retail sales in the Eurozone rose 1.5% m/m in November, above the consensus estimate of a 1.3% monthly increase. We mentioned here yesterday the growing concerns about the political situation in Germany and that this was likely to weigh down on the EUR. This is precisely what happened as EUR/USD slipped to a 2018 low of USD1.1962. The German chancellor Angela Merkel said it would be “an enormous challenge” to bridge political divisions within her own Christian Democrats and with the left-wing SPD in order to re- create the coalition that ran the country from 2013 to 2017. A failure by Mrs Merkel to agree a Große Koalition, or “Groko”, will trigger new elections at a time when her own conservative alliance with the Bavarian Christian Social Union (CSU) is under strain and losing support to right-wing nationalists who took third place in September’s federal election with 5.8 million votes. The leaders of both the SDP and CSU have said that their political careers would be over if coalition negotiations failed and Germany were once again plunged into divisive elections. Talks are scheduled to continue until Thursday and the longer they go on, the more nervous will foreign exchange markets become. The EUR opens in London this Monday morning at USD1.1965, with GBP/EUR at 1.1345.
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