Daily Market Commentary

Friday, 15 December 2017 - Market Commentary

Nick Parsons

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Thursday 15 December





Great British Pound

The British Pound had a much better day than might have been expected on Thursday, rising against most currencies except the newly-buoyant Australian Dollar and Canadian Dollars. Its best performance came – in order - against the NZD, EUR and USD. Ahead of an EU Leaders’ Summit today, Prime Minister Theresa May had dinner in Brussels yesterday evening to lobby for swift agreement on the terms of a post-Brexit transition period. According to Press reports, May told the leaders that the British government “makes no secret of wanting to move on to the next phase and to approaching it with ambition and creativity”. “I believe this is in the best interests of the UK and the European Union,” May said. “A particular priority should be agreement on the implementation period so that we can bring greater certainty to businesses in the UK and across the 27.” It seems unlikely that anything concrete will emerge from these discussions. Instead, both sides will issue constructive Press releases claiming progress is being made, deadlines are tight, goodwill exists and negotiations can proceed in the New Year. Move along please, nothing to see here… At its final meeting of the year, the Bank of England’s MPC voted unanimously 9-0 in favour of no change in Bank Rate. Its accompanying Statement read very cautiously, stressing that the pace of future rate hikes would be very gradual and limited in extent. It reiterated its judgment that that “inflation is likely to be close to its peak, and will decline towards the 2% target in the medium term.” Interest rate changes – if they are made – are more likely to be announced in months when there is also a Quarterly Inflation Bulletin and Press Conference. The cycle for this is February, May, August and November so we shouldn’t have to worry about a rate hike at the January MPC meeting.The Pound opens in London this morning at USD1.3440 and EUR1.1405, with GBP/AUD at 1.7495 and GBP/NZD at 1.9135.





US Dollar (USD)

GBP/USD expected range: 1.3410 – 1.3490

A quick look at the US Dollar index tells you that the USD had a good day on Thursday. A closer look behind the scenes, shows this is not strictly true. The EUR had a very poor day and as it comprises 57% of the index (which we highlighted here earlier this week), so the USD index was able to fight back. Having tumbled from a high on Tuesday afternoon in New York of 93.81 to 92.95 in Sydney yesterday morning. the USD index climbed back to 93.30; regaining almost exactly half its losses over the period.No matter how many times the Fed Statement is read and re-read (and your author has been doing this for longer than is healthy!) it is extremely difficult to pin the blame for any of the Dollar’s declines on the text therein: “the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” Its new economic projections revised up 2018 GDP forecasts from 2.1% to 2.5% with further more modest upgrades to the outlook in 2019 and 2020. Though two of the nine voting members dissented, there were no downward revisions to future ‘dot points’ and the belief that inflation would indeed pick up was again reiterated.We’d say the US Dollar fell despite the Statement, not because of it. And if we may re-quote Dr. Yellen’s very last sentence from her very last FOMC Press Conference, “let me emphasize the correlation is not causation.” OK, she was talking about the shape of the yield curve rather than currency markets but it’s a point that always bears repetition when looking at the multiple drivers of foreign exchange each day.The US Dollar index opens this morning at 93.12 and a busy week of economic data finishes with the Empire manufacturing survey and November’s industrial production.





Euro (EUR)

GBP/EUR expected range: 1.1350 – 1.1495

Thursday was another day of broad-based losses for the EUR which completely unwound all of Wednesday gains against the US Dollar and finished firmly in bottom spot on the one-day FX performance table. EUR/USD fell from a high of 1.1844 to 1.1765 with GBP/EUR up from 1.1350 to 1.1400. Yet again, the currency’s fall came despite very positive incoming economic data; this time another very strong set of ‘flash’ PMI data in the Eurozone. Markit’s Press Release was full of seasonal good cheer. “The eurozone economy picked up further momentum at the end of 2017, with December seeing the fastest growth of business activity for nearly seven years. The best factory output and order book gains since 2000 pushed the manufacturing headline PMI to a record high, while an upturn in service sector to growth to the highest since early-2011 underscored the broad-based nature of the current surge in activity”. As for the ECB meeting, new staff economic projections showed upward revisions to growth forecasts. 2018 GDP is now seen at 2.3% (previously 1.8%) with 2019 at 1.9% from 1.7%. 2018 CPI was nudged up from 1.2% to 1.4% though 2019 and 2020 were left unchanged at 1.5% and 1.7% respectively. The Introductory Statement was basically a “copy/paste” job from October and Mr Draghi had so little to say the Press Conference actually finished 7 minutes ahead of schedule. EUR/USD opens in London this morning at 1.1785 with GBP/EUR at 1.1400.

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