Political developments have been a major influence on the market

As we reflect on the events that have driven currencies over what has been a relatively uneventful year, one name recurs as a significant influence over the dollar.

Donald Trump.

He arrived on the political scene a couple of years ago, when he announced his intention to stand for the Presidency, an idea that was treated as little more than a publicity stunt from a reality TV personality. As his campaign gathered momentum it still seems likely that Hillary Clinton was destined to become the first female President. As the dirt that Trump was throwing over Clinton’s past started to stick more and more, the possibility of a Trump victory grew as he gained the Republican nomination.

The rest is history.

Over 2017, the dollar index has shed close to 10% having risen in the immediate aftermath of Trump’s victory as his ultimately fantastic promises were believed by his supporters. His Presidency has been overshadowed by the rumours over Russian influence on his victory but there have been some bizarre interventions and actions. Withdrawal from the Paris Accord on Climate Change, interference in domestic British politics, spats with North Korean Leader Kim Jong-un and a breakdown in his relationship with the FBI have been some of the highlights.

It is, however, the appointment of Jerome Powell, who will replace Janet Yellen as Fed. Chair after just one term in office, that will bring the most influence over the currency into 2018.

Consumer starting to abandon UK economy

The effect of last month’s rate hike is going to go the long way around in bringing down inflation as it hits the one group that Mark Carney probably wanted to protect more than any; the consumer.

Data for consumer confidence, that was released yesterday, showed that sentiment had fallen to a four-year low. As interest rates rise, banks will be concerned about a slowdown in the economy. This will lead to risk aversion which means lower multiples and higher deposits for those looking to buy a home. In turn this will feed through into a fall in house price inflation, leading to concerns over consumer spending and retail sales data which will ultimately slow the economy and lower inflation. That is the theory anyway.

Sterling has barely reacted this week and has closed unchanged against the dollar over the last two days.  Any positivity derived from the agreement to start stage two of Brexit negotiations has dissipated following the contrasting views of London and Brussels over the way Financial Services will operate once the UK leaves the EU.

The start of talks on the trade deal following Brexit won’t start until March leaving time for the political ramifications of the departure of the Deputy Prime Minister from the Cabinet to be fully absorbed. The name of Damian Green’s successor will be a major pointer to how Theresa May is thinking.

Catalonia result felt in Brussels

The political upheaval in Spain following the unilateral declaration of independence by Catalonia in the summer, which was quickly quelled by Madrid, has returned following the result of a regional election which was held yesterday.

The result was inconclusive with both sides obviously claiming victory. The regional Government will have those who support remaining as an autonomous region of Spain as the largest individual party but those parties that are in favour cessation hold most seats.

It is hard to imagine how this situation can be resolved to everyone’s satisfaction. Madrid cannot allow an officially sanctioned independence vote for fear of losing. If they insert a minimum majority of, say, 60% majority in favour of independence, they will be accused of rigging the result.

There are several regions of countries in the Eurozone eyeing developments in Spain and Brussels will want to distance itself from what it sees as a purely domestic matter.

The Euro fell following the result but the support close to 1.1820 remained intact as the market thinned with the Christmas holiday approaching. Versus the pound, the common currency was virtually unchanged as political developments cancelled each other out.

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