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Tory infighting weighs on sterling

By Alex Edwards

Tory infighting re: Brexit returned to weigh on the pound yesterday as UK Prime Minister, Theresa May managed to put together a proposal with regards to a UK/EU customs arrangement that was enough to stop Brexit Secretary David Davis from resigning and possibly cause a leadership contest to be launched. With the Irish border/customs situation continuing to be an unsolvable problem the PM held a meeting with Davis and others and finally communicated that the UK Government “expects” the current customs arrangement to last no longer than December 2021, when the transition period comes to an end. The fudged statement was enough to keep the wolf from the PM’s door and appease Brexit hardliners, for now.

GBP/USD had been creeping towards 1.35 however the political ructions caused the pound to falter dropping back below 1.34 before settling back above the big number, partly aided by some slightly hawkish comments from Bank of England Deputy Governor for Markets David Ramsden in a speech late in the afternoon. Cable is still above 1.34 and it should be a relatively quiet Friday ahead of a packed schedule next week which includes wage growth, inflation and retail sales numbers from the UK.

The dollar’s advance over the past few months appears to have finally come to a halt with some broad based euro strength over the past week causing a headwind for the greenback. It’s likely to be a relatively quiet end to this week and start to next ahead of Tuesdays US CPI numbers and then an expected rate hike from the Fed on Wednesday. Chances of a hike are above 90% however the statement and presser from Fed Chairman, Jerome Powell will be the key points of interest for the markets. Chances of four hikes this year are around 35-40% so should Powell signal he’s willing move again twice more before the end of the year we could see the dollar take another leg higher. There’s little happening today so any Trump tweets and trade talks will be the main headline makers.

The euro has rallied over the past week as a coalition was finally formed in Italy and comments from European Central Bank policy maker’s added support to the single currency. With markets undecided as to when the ECB would announce the beginning of the end of its Quantitative Easing Program it now seems likely we will get an announcement at Thursday’s interest rate meeting. The median consensus is that the ECB will confirm an extension to QE at a reduced rate of between €10-20b a month until the end of the year before ending the emergency measures which have done much to shore up the EZ economy over the past few years. The finer details of the decision will be scrutinised, with a euro rally expected should Mario Draghi confirm this will definitely be the end of QE and not leave the door open for further stimulus in 2019. We can expect the euro to bolt should Draghi confirm there will be no taper and QE will finish in September, however this would likely rattle the markets so we should expect an extension of some sort to be confirmed. EUR/USD trades at 1.1785 with GBP/EUR hovering around 1.14.

AUD/USD has slipped below 76 cents this morning as commodities fall dragging Asian and European equities with them. AUD/USD is currently at .7690 and GBP/AUD at 1.7690 with little likely to move them a huge amount as we head into the weekend. Politics from the G7 meeting may cause some headlines however markets moves are more likely to be felt on Monday given they continue on to Saturday and it’s being held in Quebec.

Trade tensions continue to weigh on the loonie as we finish the week despite some slightly hawkish comments from Bank of Canada head, Stephen Poloz yesterday. Poloz stated that some of the debt risk Canadians have experienced appear to be easing however trade tensions were again highlighted as being a potential risk to the economy. USD/CAD is trading around 1.30 with GBP/CAD at 1.7455.

The Kiwi has trade between .70 and .7050 US cents over the past three days as the dollar rally stalled and markets begin to position themselves ahead of next week’s FOMC, ECB rate decisions. Data-wise its dead as a Dodo next week so all the action will come from G7 talk and central bank decisions. GBP/NZD is at 1.9120.