Comments from Theresa May saw the Pound plunge dramatically at the start of the week, with suffering from a resurgence in market fears of a hard Brexit. May’s statement that the government is not interested in keeping ‘bits’ of its EU membership led to speculation that privileged access to the single market is likely to be lost. Naturally this put severe pressure on Sterling, pushing the GBP/EUR exchange rate to a two-month low of 1.14. As May later denied this suggestion investors were frustrated by the ongoing lack of clarity over the government’s negotiating position; something which may get worse in coming days. If the Supreme Court rules against the government in its Article 50 case the Pound may extend its losses further.
The appeal of Sterling was also hampered by a larger-than-expected widening of the UK visible trade deficit, which jumped from -9.8 billion to -12.1 billion in November. This raised concerns over the economy’s ability to absorb further market volatility as the process of Brexit gets underway in earnest, prompting further selling of the Pound. A rallying point could come on the back of December’s Consumer Price Index report, though, with an increase in inflation expected to boost demand for Sterling. While higher inflationary pressure does not bode well for consumers, it would be seen to increase the chances of the Bank of England (BoE) raising interest rates, to the encouragement of investors.
December’s labour market data proved to be a little disappointing, with a smaller number of jobs added to the economy than forecast as the unemployment rate rose to 4.7%. Even so, this was not seen to dent the likelihood of the Federal Reserve raising interest rates in the coming months as the job market remains in robust health. As markets remain optimistic that Donald Trump will deliver on his promise of increased fiscal stimulus and business confidence rose, the US Dollar remained well supported. If the advance retail sales and University of Michigan confidence index results both point towards increased consumer optimism then the ‘Greenback’ could push higher against its rivals. Even so, some volatility could be in store ahead of Trump’s inauguration.
Confidence in the outlook of the Eurozone economy was boosted by an unexpectedly strong raft of German data at the start of the week. Encouragingly, the trade surplus was found to have widened significantly from 19.4 billion to 22.6 billion as exports jumped sharply on the month. This pointed towards the continued resilience of the Eurozone’s powerhouse economy, increasing the impetus for the European Central Bank (ECB) to consider tightening monetary policy. However, the Euro could come under pressure in response to December’s ECB meeting minutes, which are likely to demonstrate continued dovishness amongst policymakers. If indications point towards the quantitative easing program continuing unchanged for the foreseeable future, the EUR/USD exchange rate could slump.
|Upcoming UK, US, Eurozone Data||Market Expectation|
|January 12th 12:30 EUR ECB Monetary Policy Meeting Accounts|
|January 13th 13:30 USD Advance Retail Sales (DEC)||0.70%|
|January 13th 15:00 USD University of Michigan Confidence Index (JAN P)||98.5|
|January 17th 09:30 GBP Consumer Price Index (YoY) (DEC)||1.20%|
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