Ample Liquidity Slows Pounds Fall

Diplomats sharpening their claws

Britain’s Brexit Minister and the President of the European Council now have eight days to get their manifestos in order before they must set out their opening moves in the Brexit chess game.

Following yesterday’s announcement that Article 50 would be formally triggered next Wednesday, the pound paused as traders spluttered. It then dropped in an orderly fashion to a low of 1.2330 before rallying a little as all the weak short positions were amply covered by the volume of liquidity that is now commonplace.

Only when a rare “Black Swan” event occurs such as the actual Brexit decision or Trumps victory do Liquidity Providers disappear.

The pound is set to ride a bit of a rollercoaster over the next few weeks as the big topics such as access to the single market, free movement, and the fate of U.K. and E.U. citizens living in each other’s countries is agreed.

Sterling has support around 1.2220 but has struggled to make any ground above 1.2480. With the end of the first quarter fast approaching, importers will be looking at any sign of Sterling strength to lock their currency purchases in having suffered serious issues over the past 6/9 months.

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Dollar struggling following FOMC rate decision

In the manner of a child who has just eaten a bar of chocolate, traders are equally never satisfied and are looking for the next one. The bar of chocolate in this case is the next hike in U.S. interest rates.

Since last week’s 25bp hike by the Fed., the market has been disappointed by the lack of any clear guidance as to when the next hike will take place. Since the FOMC are sticking to a three-hike strategy for 2017 it is perfectly feasible that the next one may not be until Q3!

Janet Yellen the FOMC Chair, who will make a speech on Thursday, has the unenviable task of trying to satisfy the administration’s demands for a faster return to “normal” monetary policy conditions but is (presumably) still in the dark over what the President is planning in stimulus, job creation and trade agreements.

As things stand, most economists would agree that the FOMC has managed to handle things as well as could have been expected. The problem is the more you tell the market, the more they want to know. Back to that little child again!

G20 hits Protectionism impasse

Two of the most immovable incumbents currently occupying Finance Minister Positions in the G20 locked horns over the weekend. Wolfgang Schaeuble the German Finance Minister and “Scourge of Athens” bumped heads with the new American Treasury Secretary Steve Mnuchin.

The result was an inevitable impasse with both remaining entrenched. Herr Schaeuble stated that it appeared Mnuchin had no mandate to negotiate. This is tantamount to saying that he is simply Trump’s mouthpiece. Mnuchin retorted that “the United States had allowed too much leeway, to its own detriment during the “Eight Democratic Years” and it is now time for a fair deal that discriminates against no country”.

It seems that the only thing Schaeuble and Mnuchin have in common is a pair of almost unpronounceable surnames!

Big Day for the U.K.

As if the announcement of Brexit wasn’t enough, today sees a pair of economic releases that could set the course for the economy well into the second quarter.

Producer Prices and Inflation will be released later this morning. It is difficult to predict anything now. If traders take the MPC at face value, it is likely that Producer Prices will be a little better that last month’s monumental 20.5% increase and Inflation will be benign with a YoY rise of around 2%.

Having said that, there is always the “Forbes Factor” where inflation is close to 2.5%, and Producer prices increase by even more than last month.

With retail sales to come later in the week, it is already developing into quite a week for the pound.