IFX Market Report
Friday 10th February 2017

Market Report

As the dust settles on a busy week in parliament, sterling sits comfortably above 1.17 as an exit-strategy is developing and the approach to Brexit is mapped out. We now know that the parliamentary approval has all but been agreed, with just the upper chamber, the House of Lords left to agree to terms. We also know that the legislation is planned to be completed by 7th of March. In an environment of uncertainty, just having this information is enough to really help buoy the currency. How long we see it enjoying these levels, I fear will be determined more by the USD and EUR and their developments.

The pound can try as it might to ignore it has lost significant value since Brexit, that inflation is set to rise passed previous levels and with reluctance from the BoE to attempt to curb this with an interest rate hike. The pound is going to be fragile and sensitive to announcements in the coming months and with the USD gearing up to provide some clarity over future Fiscal / Monetary policy the GBP has room to fall as focus shifts back to the USA.

The GBPEUR rate has surprised many market participants this week by holding onto its gains. We start today just over 1.174 and with today bringing the first real piece of GBP economic data, in the form of Manufacturing Production and Goods Trade Balance we could see it push back over 1.175, although given the stubborn resistance above, we are dubious if GBP will be able to push much higher.

The GBPUSD rate moved lower yesterday as the Dollar strengthened, following the news that President Trump is promising to unveil a major tax announcement in the coming weeks. Being famously pro-business, this tax reform will be aimed mostly at business’ with an aim to lower the burden and generate better growth. This statement came just after the U.S. Unemployment data was released showing a better reading than forecast (near a 43-year low) with 234k from 249k expected. Today we have the University of Michigan consumer sentiment released at 1500.

This morning at 09:30 the UK releases of raft of important data. The highlights include Manufacturing and Industrial Production data, as well as the Total Trade Balance for December. Both Manufacturing and Industrial production data are forecast to contract from the November number of 0.5% and 0.2% respectively, on a month-on-month basis, although this will still be an increase on the numbers from December 2016. Traders will pay close attention to the trade balance as any late sign of a post-Brexit fall will be negative for the pound. Finally at 15:00 we find out the result of the NIESR January GDP estimate.

Worldwide News

The U.S. economy yesterday, did not only hit close to a 43-year low reading for unemployment yesterday, receive an announcement from Trump that there will be a future 'phenomenal' announcement about planned Tax reform in coming weeks, we also had more details emerge about how the US plans to ease banking regulation. The trump administration seems to be pointed directly at reducing regulation in certain industries especially finance. Trump seems to view business regulations as preventing business to grow and flourish as there are too many obstacles in the way.

He has signed an executive order outlining his intention to relax banking laws that were brought in, after the financial crisis of 2008, potentially changing or getting rid of the Dodd-Frank reform law. If successful, this new legislation called “The Financial Choice Act” will have the U.S banks face less oversight if they increase their capital reserves, and startups would have easier access to investors. This is still early days and the USA recovers from super bowl fever, James Ballentine of the American Bankers Association stated that “if this were football we would only be in the first quarter”. The day ahead brings the UoM consumer Sentiment which is interesting to close the week on as it helps measure future spending behavior and provides a level of optimism of the US consumer. This release is due at 15:00.

For the Euro, political uncertainty continues. The USD is strengthening and EURUSD is poised for huge falls if the European political landscape shifts to the right. However it is not all bad news coming out of Europe. Positive earnings data from Thyssenkrupp, Societe Generale and Total managed to provide some support for the single-bloc currency. Today we have French and Italian industrial production to provide some direction.

EURUSD has certainly not had the best week and the announcements yesterday strengthening the USD did not help at all as generally the USD and EUR move conversely, with the Dollar on the rise, the EUR has continued its fall. Political uncertainty is obviously still an issue for the EUR but Euro data disappointed yesterday too. German Trade Balance came in at 18.4bn from 23.2bn missing the mark by quite a distance. EURUSD trades 1.04% below the opening rate of the week at 1.0643 this morning.

This morning at 10:00 the Bundesbank President, Jens Weidman is giving a speech. This afternoon there is a light data calendar although at 13:30 the U.S. release their import / export index and Canada release their key Unemployment Rate. U.S. exports are forecast to reduce from 0.3% in December to 0.1% in January and Canada are forecast to see their unemployment rate hold at 6.9%.