Brexit Hopes and Set to Become Reality

Brexit trigger expected

The pound traded in a narrow range yesterday, pressured by stagflation fears and only supported by hopes that any slowdown in consumer spending would be less than feared. The two-week low of 1.2382 is proving support but fears over Brexit negotiations starting with aggressive stances from both sides are fuelling sellers on approach to 1.2500.

Yesterday’s survey of household intentions showed that consumers expect to have less money towards the end of the year as inflation moves towards 3% but wage growth fails to keep up. Given the fragility of consumer confidence, the Bank of England’s hands are tied to a certain extent and they will need to see inflation growing at significantly above trend before they adjust current monetary policy.

As we come to the end of the month, focus will return to the Government’s plans for triggering the formal notice of resignation from the EU. The upper house of Parliament could still add conditions to the Government’s negotiating terms but they will not delay passage of the bill. Article 50 will be triggered by March 31st and this should prove a catalyst for sterling to move out of the narrow ranges in which it has been trading. Against a Euro which is drifting, the pound rallied to trade below 0.8500 but support at 0.8480 saw it return to familiar territory around 0.8510.

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Trump to online tax plans to Legislators

Later today, President Trump will use speech to add substance to his tax and economic policies. He is likely to confirm an increase of 5% in defence spending, paid for by cuts to overseas aid. This will be the first step in his “America First” strategy. If his speech disappoints and is similar in tone to his inauguration, the dollar, which has been trading around 101 against a basket of America’s trading partners’ currencies, could fall back below 100 which where it was trading before Trump took office.

The Euro, facing headwinds from political concerns, sees resistance above 1.0620 but major selling interest near the high of the year, around the 1.08 level. The Dutch and French elections are providing a driver for traders to test downside support below 1.04 and parity could well come back into focus. Wilders and Le Pen’s campaigns continue to attract attention. Neither is likely to achieve victory outright but the wind of change from an upswing in populist nationalist sentiment could rattle Brussels and drive a fall in the single currency.

U.S. orders for Durable Goods fell in January, following three months of strong gains, but a 0.4% fall (following a 1.1% gain in December) did little to dent market views that manufacturing continues to pick up.

The Fed. remains on track to hike rates again at its next meeting (March 15/16) following more definite guidance from the Chairman of the Dallas Fed. who is a voting member of the FOMC. The different paths of U.S. versus Eurozone interest rates will be a major driver of the exchange rate movements, once the upcoming elections are out of the way. Fundamentals point towards a stronger dollar, no matter what the President and Treasury Secretary say.

The Australian economy will receive a further boost as trade data is set to be released. Last month’s record rise in exports could be surpassed driving the currency higher. Last week’s signal that we have seen the last of interest rate cuts is providing support around 0.7550. The upside is not particularly protected and a further record trade surplus could see the AUD soar to 0.7800