Sterling Calm Before the Storm

UK facing transition concerns

The chances of a Brexit transition deal being agreed at the upcoming EU Heads of Government meeting continue to fade as the two sides appear as far apart as ever over several critical issues. The Irish border remains the most contentious issue with both London and Brussels seemingly entrenched in their respective positions.

The EU cannot countenance anything other than a solid border between the North and South unless the North remains within the customs union in which case the border would be in the Irish Sea.

The UK Government is left with a dilemma due as much as anything to Mrs May’s reliance on the Democratic Unionist Party to keep her Government in power and therefore cannot accept any proposal which marginalizes the North. Added to this, Donald Tusk the EU Council President is pressuring London to come up with an alternative proposal where none seemingly exists.

Sterling has held up will versus both the dollar and Euro over the past week but faces a tough time as the Brexit headlines start to reappear. It reached a high of 1.3911 last week versus a dollar which was mixed at best and 1.1266 against a euro which faced its own monetary policy issues.

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U.S. Employment data typically uncertain

The U.S. recorded the highest rise in new jobs created since May 2016, but the dollar’s reaction was muted due to the fall in the rise in earnings from 2.8% to 2.6%. The January figure of 2.8% had been revised lower from its original 2.9%.

The headline new jobs figure is notoriously unpredictable since it contains several estimates as well as hard data. February’s +313k was up from January’s already upwardly revised 239k. Whilst this single month won’t change the markets perception of the rate hike scenario for the U.S., the base case three hike strategy appears to be the most likely to be implemented given the current data.

The dollar index had a better week as the U.S. trade position became clearer. A trade war is unlikely given the number of “free passes” the administration is going to allow over the new 25% tariff on imports of steel and aluminium.

Tripartite talks have been taking place between the U.S., EU and Japan over trade restrictions and as long as all parties are talking the effect on the market will be minimal. The index made a high of 90.37 last week but needs to break solid resistance at 90.50 before its recovery can be considered complete.

Euro in doldrums as Monetary policy weighs

It seems that in much the same way that Brexit is “out of sight out of mind” for the pound, so monetary policy will have the same effect on the single currency. Between ECB Council meetings the Euro tends to climb based upon the expectation that Mario Draghi will finally accept the inevitable and discuss the tapering of the Asset Purchase scheme and a tightening of monetary policy only for those hopes to be dashed.

It is easy to say that the global economy has entered a new low interest rate environment as inflation is benign in nearly every major economy (the UK being the exception) but it will take a long time and more evidence before such a theory can be considered proven. In the meantime, fears continue that the ECB will fall behind the curve and be caught out if inflation starts to pick up.

It remains a distinct possibility that Sr. Draghi could leave office at the end of his eight-year term in November next year never having raised interest rates. That will be as much due to his dovish nature as to the extraordinary circumstances that have prevailed during his tenure.

The euro fell last week following the dashing, yet gain, of hopes that there would be a signal of a hawkish change in policy. It reached a low of 1.2269 but has since regained the 1.23 handle recovering to close on Friday at 1.2306