Sterling enjoyed a huge rise versus its trading peers on Tuesday, as a consequence of the UK’s prime minister spelling out her government’s plan and timetable to exit Europe. Despite her harsh rhetoric, insisting on what’s termed a “hard Brexit”, currency speculators and investors bid the pound up. The overarching reasons for the rise in sterling’s value were two fold; the mention that the UK’s parliament will have the final say on Brexit conditions encouraged some analysts and market commentators to believe that the removal from Europe may not be as harsh. Whilst a relief rally developed in sterling on the basis that finally, after much prevarication and indecision, there is a plan and timetable in place.
The first assumption is erroneous, parliament will not defy the supposed “will of the people” and vote down Brexit, neither will they insist on a more European leaning, softer exit, it’ll still be a Tory right wing agenda. As for the relief rally many analysts still maintain that the pound is overbought and that the true impact of Brexit will not be revealed until the UK actually exits.
As a portent of what may be coming for the UK’s economy once Brexit begins, no sooner had Theresa May finished her speech and a German trade body, the DIHK association, issued a statement suggesting that German firms should “scale back investment in the UK” due to its Brexit stance.
Politics also dominated the other side of the Atlantic, as Donald Trump suggested that the dollar was too strong and as a consequence was hurting USA industry. Therefore a significant percentage of the pound’s rise versus the dollar was not necessarily due to sterling’s strength, but dollar weakness; the dollar fell circa 1.25% versus a basket of its main currency peers. The pound climbed by over 3%, towards the end of the trading session on Tuesday reaching $1.24098 as of 22:20 p.m. in London, the strongest level seen since Jan. 6th. The currency fell to as low as $1.1986 on Monday.
Prior to Tuesday’s sterling’s action, the currency had fallen by 20% versus the dollar and by 14% versus the euro since the Brexit vote in June 2016. It gained circa 6% versus the dollar from late October to early December, but then commenced a steady decline in an unbroken weekly series, until reaching a floor on Monday.
The Dollar Spot Index fell by 1.3% in New York to reach the lowest level in a month. USD/JPY traded at 112.68 per dollar, down 1.4%. Yen has now strengthened by approx. 3.7% over seven sessions.
With the exception of Italy’s MIB (up 0.25%), European markets experienced a sell off during Tuesday; DAX down 0.13%, CAC down 0.46%, and the UK’s FTSE 100 closed down 1.46%, in a correlated move versus GBP/USD rising. STOXX 600 index fell by 0.2%, after clawing back losses of 0.7%. The DJIA closed down 0.30%, with the SPX also down 0.30%. The small caps USA index, the Russell 2000 (often regarded as a wider measure of USA corporate health) closing down 1.44%.
Gold further extended its winning streak to seven days, the longest winning streak seen since November, priced at $1216 per ounce towards the end of Tuesday. Silver was at $17.20, both metals enjoying appeal as safe haven assets during periods of volatility and uncertainty. Crude oil added 11 cents to $52.48 a barrel in New York, whilst Bloomberg’s commodity index rose for a fifth day in series.
Economic calendar events for January 18th 2016, all times quoted are London times.
07:00, currency effected EUR. German Consumer Price Index (YoY) (DEC). German inflation annually is expected to have remained stable at 1.7%, any deviation from this yearly (or monthly) reading could effect the value of the euro.
09:30, currency effected GBP. ILO Unemployment Rate (3M). The prediction is that the UK’s unemployment figure has remained static at 4.8%.
10:00, currency effected EUR. Euro-Zone Consumer Price Index (YoY) (DEC). The prediction from analysts polled, is that the Eurozone’s inflation level has remained stable at 1.1%
13:30, currency effected USD. Consumer Price Index (YoY) (DEC). Annually inflation is predicted to have risen to 2.1%, from the previous reading of 1.7%. This anticipated rise may give further ammunition to the Fed, when considering future base rate rises.
14:15, currency effected USD. Industrial Production (DEC). The prediction is that production will have risen to 0.6,% from the previous negative reading of -0.4%.
14:15, currency effected USD. Manufacturing (SIC) Production (DEC). The estimate is for a rise to 0.5% from the previous negative reading of -0.1%.
15:00, currency effected CAD. Bank of Canada Rate Decision (JAN). The anticipation is for the bank of Canada to have decided to keep rates at 0.50%.
15:00, currency effected CAD. Bank of Canada releases January Monetary Policy Report. Combined with the publication of the base interest rate decision, the central bank will also release its minutes concerning the discussions leading to the interest rate decision. These minutes are often keenly watched by investors, for signs of any “forward guidance”, as to future base rate decisions, or other monetary policy interventions.