Sterling fall likely to continue
Last Friday, I wrote about taking a short position in Sterling and possibly fading into it were the rally to continue. That rally never happened but at least I managed to get (and remain) short as I believe that there is more weakness to come. Versus the dollar, I still see 1.3820 as a target but against the common currency, it will be much more a matter of timing. More on that below.
Sterling traders await tomorrow wage data which will be released as part of the employment report for January. The headline data in the UK has become less and less important as wage inflation has taken centre stage, particularly since real wage growth is still in negative territory.
The Bank of England appear to be hell bent on hiking rates in May no matter what happens over the Brexit transition talks that should have been completed by then. The Central Bank has little problem reversing monetary policy decisions should the situation demand and even if the transition talks reach a satisfactory conclusion, the discussions over the future relationship are sure to be tough.
Euro facing Italian dilemma
Just when we all thought that the electoral picture in the Eurozone had resolved itself with the entirely predictable formation of a grand coalition in Germany, the general election in Italy is about to provide a backdrop of uncertainty.
The result isn’t particularly in question. There will be a coalition, most likely headed by Silvio Berlusconi’s Forza Italia. But, there are two parties who will most likely be part of the coalition who will cause alarm in Brussels. Five Star may sound more like a girl band than a political movement but they in conjunction with the Northern League promise mass repatriation of the flood of immigrants who have been crossing the Mediterranean in droves and settling in Italy despite promises from Brussels for a fairer distribution.
The Euro has been in relatively narrow ranges despite making a new multi-year high at 1.2510 last week. Its correction could be shallow as the dollar recovery looks tenuous as best.
Should the Euro remain above 1.2350 for an extended period, the ECB will become more concerned over the competitiveness of the regions exports and the ability of the weaker economies to continue to grow.
Dollar recovers a little, but issues remain
Donald Trump’s urban regeneration programme which is a cornerstone of his America First rhetoric looks a lot more like a Democratic policy than a Republican one. It is, of course, given away by the tax cuts that in conjunction with the infrastructure programme will push he U.S. budget deficit towards one trillion dollars sometime next year. The potential size of the deficit is starting to alarm commentators and the continued reliance on Japan and primarily China to continue to fund the deficit is worrying.
The dollar index recovered a little yesterday on a bout of bargain hunting and technically it looks like it can possibly test 82.80. With the rate advantage likely to peter out towards the end of the year despite a three (or maybe four) hike policy from the FOMC, the dollar suffering a close to 20% in a little over a year is even more remarkable.
The confusion caused by the very public disagreement between Treasury Secretary Mnuchin and President Trump (despite Mnuchin’s comments being misinterpreted) has been the catalyst for the renewed weakness of the greenback if a period of “benign neglect” occurs, this will bring concern to the ECB.