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Sterling shrugs off Brexit concerns

Last week was a good week for the UK economy, Sterling and Brexit. If what has been happening in the recent past continues and the pound rallies during periods when Brexit isn’t in the news, then it could test its high at 1.4280 if this week’s GDP data is at the top end of expectations.

However, the question of the Irish border remains, and a financial settlement is also still far from agreed. As the second quarter gets under way, Sterling looks set to rally further but it is unclear just how much the market is pinning its hopes on a May interest rate hike.

Last week’s MPC meeting was hardly conclusive on the subject despite two votes for a hike right away. Governor Mark Carney said following the last hike in November last year that any future hikes would both be some way in the future and data dependent. Inflation is 10% lower than it was then at 2.7% and a fall in the March data will make a rate hike somewhat difficult to justify.

One nagging doubt remains and that is the rumours regarding the Irish border. If, as has been rumoured, David Davis and Theresa May have agreed a deal that will “hive off” Northern Ireland to remain under part of the single market and customs union and effectively moving the border, the Government faces an almost impossible task is selling that to the DUP who, incidentally, are the only support that May has for her minority Government.

Trump on a collision course with Beijing

President Trump considers he is the leader of the Free World. He also has very little regard for any other nation making his America First credo perfectly obvious. Vladimir Putin and Xi Jinping may have something to say and Trump’s continual goading of China over trade cannot be expected to end well. Tariffs on Chinese imports into the U.S. will be met by some retaliation

China is known to be patient and plays the “long game”. They will be in no hurry to act but there can be little doubt that they will ensure that their feelings are well known.

The Yen continues to climb versus the dollar as concerns over a possible trade war combine with issues facing Japanese Prime Minister Shinzo Abe. It is counter-intuitive to see the currency appreciate as the country is in the throes of a political storm but as Abe is the architect of the weakening of the Yen, any possibility that he could be removed from office raises fears of the reversal of his Abenomics policy.

This week’s release of growth data will contribute to the outlook for rate hikes in the U.S. as will next week’s employment report. With the Fed only expecting to hike twice more this year, it will take far stronger growth to raise expectations any further.

Second Quarter; more of the same

How was it for you?

The first quarter is coming to an end and there has been nothing that has happened so far in 2018 to change most analysts view of how the year will shape up.

The Euro perhaps hasn’t performed as some would have expected. There was an expectation that the common currency would have risen above the resistance at 1.2520 but some clever behind the scenes activity for the ECB has held it firmly within a relatively narrow range.

Putting black swan events aside since we cannot predict such incidents, what can be expected from Q2?

Brexit negotiations will continue and there may be an announcement about a trade deal during this period. As so many issues have been “kicked down the road”, there is a danger of a major development which could be Sterling negative.

The Euro remains in a relatively tight range, but as probable tapering of the Asset Purchase Scheme takes place the effect on the currency could be negative which could see the single currency fall back towards 1.2000 which would satisfy the ECB.

Finally, the dollar. A weak undertone is sure to continue simply due to President Trump’s actions. It is impossible to say what will come next, but trade wars and protectionism cannot be good for the greenback.

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Alan is a highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. He has had a varied career in Global markets, Risk management, FX Trading and Sales & Interest Rate Management. He has managed sales teams mentoring his team in both markets and marketing.He has been published in a number of journals and has appeared daily on radio to discuss market movements and events. His first novel was recently published.