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Sentiment driving pound to new highs

Alan Greenspan said it best, “irrational enthusiasm”.

The market has become infatuated with a rate hike in the UK. Why is that? Is it because Central Banks have passed the initial flush of excitement generated by the emergence of the global economy from the long dark throes of the global financial crisis and now see any bank willing to hike as a paragon of financial conservatism? It cannot be simply the widening of the interest rate differential between the pound and euro.

For me it’s irrational and very short-term thinking. What happens after May 10th? Is it the start of a series of hikes, or another one-off? Can the UK economy, faced with the uncertainty of Brexit sustain a further series of hikes? Will the housing market continue its rally despite the downturn in activity already being seen?

Sentiment seems to be the pound’s biggest friend right now. Analysts, choosing to ignore what is happening seem happy to endorse the more hawkish views of the MPC.

Sterling continues to threaten the post-referendum high which should have a dampening effect on inflation which has been falling over the past few months. The Interest rate hike which took place last November was slated at the time as being a one off and yet another is now on the cards despite inflation moving the what is for the Bank of England, the right direction.

Trump playing manipulation card

It is the time of year when the U.S. Treasury starts throwing around labels for countries it believes create artificial weakness in their currency to gain an advantage in global trade. Last year it was Germany who, surprisingly felt the sharp edge of President Trump’s tongue. This year we are back to the usual suspects, Japan and China although rather unsurprisingly, Russia finds its way onto the list.

Japan has a confirmed weak Yen policy which is the cornerstone of its economy. This allows it to compete for its share of global trade is just about tolerated given the size of America’s indebtedness to it. China is still emerging on the world stage and has been indulged but President Trump’s “patience” is wearing thin. A country with clear global ambitions which include one day controlling the world’s reserve currency China is prepared to wait for its chance.

The dollar index remains hemmed in at low levels despite continued complaints about artificial weakening by other countries. Since the rather comical disagreement between the President and his Treasury Secretary at Davos, the dollar has barely put its head above the parapet. The Euro, however has had something of meteoric rose which has come to an abrupt halt. There is little doubt that Central Banks continue to have a hand in controlling the pace and direction of currencies.

Politics and debt cast shadow over Euro

The common currency appears to be in a kind of limbo, partly created by the abundant and growing liquidity available in the market and partly due to factors which simply continue to be “kicked down the road”.

The Eurozone has reached a crossroads where the original experiment has run its course, mostly been a success and now needs to kick on. There are two major issues, no political figure is sufficiently secure in his home country to be able to push through reform and the wheels of the bureaucracy turn so slowly as evolution is considered better than revolution.

In France Emmanuel Macron was elected on a pro-EU ticket but is facing unrest at home over the domestic economy. Angela Merkel was expecting what is likely to be her fourth and final term to create her legacy but has faced difficulty in even creating a coalition at home.

Brexit is still an unknown throughout the EU with no one knowing what the effect on free movement will be as the UK also adjusts. The Eastern borders are sealed with radical anti-immigration leaders to the fore in many countries. The poster boy is Viktor Orban who believes that Europe’s borders should be closed and with the weather improving in the Mediterranean the influx of refugees will start again.

 

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