Time for Trump to show caution.
There is little doubt that there needs to be some form of retaliation if as has been proven in the eyes of several world leaders the Syrian Government used chemical weapons against its own people. To then hide behind a total ban on allowing foreign observers into the area and securing the backing of Russia and Iran provides more credence to the claims.
The FX market continues to observe the escalation not quite sure how to react. It seems that it should have an effect but what is it?
Does a rise in risk aversion drive traders into long CHF or JPY positions? So far it appears that as far as FX is concerned, the trade issue is a far more understandable piece of news.
So, traders will most likely sit on their hands and allow the situation to take its course. The dollar index has really reacted since Trump escalated the situation by warning Syria to “expect rockets”. It is likely that the UK will support the US. The Cabinet has been recalled, meeting today, and the Prime Minister will present the evidence to her colleagues.
Economic data has taken a definite back seat over the past week, indeed since the rather odd employment report, and with no important data to be released this week, there may be a slight recovery in the index.
Sterling ignoring reality.
I may be beating the same old drum and, as they say, even a broken clock is right twice a day, but I genuinely believe that the optimism surrounding Sterling is way overdone.
The Manufacturing and industrial production numbers that were released yesterday were truly horrible and the time has passed to keep blaming bad weather as it is similar every February!
Over the course of the Brexit negotiations, there has been a build-up of optimism every time the talks have gone behind closed doors. Michel Barnier, the Chief EU Negotiator commented yesterday the UK can change its mind about the single market any time until 2021. I’m not sure where he got that date from.
Following the data yesterday a small dose of reality crept in and the pound has been unable to sustain itself above 1.4200, although there is no expectation of a test of 1.4120 in the short term,
The market is very long, and it will be interesting just how many traders retain those positions into next week’s employment and inflation reports where the risk for CPI is clearly to the downside. MPC members seem to be picking their data to fit their wishes. Last November the hike was to dampen CPI which remaining close to 3% now that has fallen a little the concerns switch to wage inflation.
Euro on Vacation.
It is very difficult to get excited about the prospect for either a rally or a depreciation of the common currency.
For there to be a significant rally, today’s ECB minutes will need to be far more hawkish than they have been for a very long time. Mario Draghi’s recent comments have all but withdrawn that prospect from the table, but what of the downside?
The downside for the euro is very well protected simply because very few people can envisage a scenario in which it falls to test the “line in the sand” at 1.2160.
The euro is simply in reactive mode, data is neutral, political issues are (probably) being dealt with and monetary policy is well known and unlikely to change.
Of course, where the EU be dragged further into the crisis that is developing with Russia, there several issues that could arise, not least the turning off the gas supply.
The last time there was a major issue between Russia and Europe, Government bonds were defaulted upon and several large hedge funds went under. It is a real possibility that that could happen again, but it is to be hoped that the ECB has measures in place despite the debt overhang still facing the region.