Sterling Strong on Brexit Eve
Sterling hit $1.26 yesterday as the markets reacted to Trump’s healthcare debacle which proved a poor start to his presidency. The new £1 coin is launched today on the eve of Article 50 being triggered in a historic move that could slash Sterling’s recent strength. Politics takes centre stage today as a bevy of Brexit related speeches and events will be rolled out.
The US dollar dropped to its lowest levels since November, erasing all the swagger it’s gained since Donald Trump’s election. The markets are still nervous, but the dollar is recovering today after two Federal Reserve speakers indicated it’s still likely they’ll be a series of interest rate hikes this year.
Pound Sterling – UK Markets
The pound was lifted to a 7-week high against the dollar yesterday, despite the looming shadow of Article 50 being triggered tomorrow. The Brexit Secretary David Davis is disputing the £50 billion ‘divorce bill’ that’s been presented by EU officials, suggesting the negotiations are already off to a rocky start. Other political uncertainty comes from the Scottish parliament’s second independence referendum vote today.
A Brexit without a deal for food suppliers could limit the UK’s supply of food and drink while tariffs would lead to higher prices. This concern has united The National Farmers Union, the Food and Drink Federation and the British Retail Consortium who have published their Brexit wishlist in a letter to Prime Minister Theresa May. They stress that Britain should establish transitional arrangements to avoid expensive customs checks, securing bi-lateral EU trade agreement for tariff-free trade. Basically, they’ve outlined ways which maintain trade conditions as closely as possible to those currently in practice.
The Bank of England has asked UK banks, insurers and other relevant financial institutions to provide them with their plans for coping with Brexit. The bank wants to be sure that City firms have several contingency plans in preparation for a sudden loss of access to the European market. The bank is also initiating a review into consumer lending standards.
US Dollar – US Markets
The US dollar was slashed to a 4-month low by US President Trump’s failure to push through a healthcare bill. Wall Street saw its longest losing streak since 2011, with shares falling on the disappointment that President Trump isn’t demonstrating any finesse at deal-making. The US President has threatened conservative Republicans that unless they support his agenda, he’ll punish them in future political battles including tax reform policies. The dollar has stabilised on the expectation that Trump will deal more artfully when it comes to his tax reform plan. Also, confident comments by a US Federal Reserve member suggesting 3 interest rates hikes helped check the dollar’s freefall. There’s one more Federal Reserve speech today, which could help the dollar by emphasising the bigger picture of the US economy’s strength, refocusing away from the political uncertainties.
Trump’s inability to pass a healthcare reform bill has chastened the overly ambitious markets who imagined the US President quickly drawing up and passing fiscal stimulating bills. The Observer pointed out 3 reasons why the market surge since Trump’s election is rightly short-lived. Investors tended to react to his campaign promises as if he’d promoted a get-rich-quick scheme. Now reality is setting in: it may take until 2018 to have a tax reform and stimulus plans agreed. Budgeting the fiscal stimulus will be more difficult without the savings that would have come from replacing Obamacare. And, if his policies are approved, the rising dollar, wages, and interest rates would cut corporate profits, which would be reflected in the stock market.
Euro – European Markets
The Euro rose to its highest level since November after the European Central Bank said the markets should be prepared for ‘a change’ in policy. This was the latest in a hat-trick of boosts for the single market currency. Last Friday’s German PMI showed manufacturing in March was growing at its fastest rate in almost 6 years. This indicated that Europe’s biggest economy would grow more quickly in this year’s first quarter. Next, German business confidence surged to its highest levels since 2011, according to yesterday’s Ifo business sentiment survey.
The Eurozone could be radically altered by this year’s elections. Germany’s top political office could be passed from Chancellor Angela Merkel, who has held her post for 12 years to a man who is almost her polar opposite in terms of experience and education. Social Democratic (SDP) Martin Schulz, the populist who never finished secondary school is gaining support in Germany’s elections. Voters hoping for a change could turn away from Chancellor Merkel, who, with a doctorate in physical chemistry, and her long tenure as the head of the European Union, is seen as the establishment elite. Merkel’s prospects look better since her Christian Democratic Union (CDU) party won a majority over 40% of the vote on Sunday vote in a small region of Germany while Shultz’s SDP didn’t reach the 30% share that had been expected.
Other Currencies – Highlights
Thanks to the failure of ‘Trumpcare’ the Japanese yen has been up and down like a yo-yo lately. The US dollar fell to a 4-month low against the Japanese yen yesterday. Last week the yen had slid down when The Nikkei Purchasing Manager’s Index (PMI) for March showed a 3-month low. Any reading over 50 demonstrates growth, so the figures showed a slight slowdown in production. February’s had come in at 53.3, whereas March’s preliminary or ‘flash’ PMI was down to 52.6. The weaker yen was positive for exports which were much stronger than expected in February, rising for the biggest gain since January 2015. This was over 11% in growth compared to February figures a year earlier and accounted for ¥6346.5.
On Monday, the safe-haven yen soared as the US dollar dropped. Now the dollar has stabilised in Asian markets as investors dial back their Trumponomic expectations. The US has dropped out of the Trans-Pacific Partnership free trade deal but remains committed to boosting bilateral economic ties with Japan. The 2 governments are considering a free trade deal that would have them sharing access to 30% of the world economy. There are reports that Vice President Mike Pence is planning to attend an economic meeting with Deputy Prime Minister Taro Aso in Tokyo on 18 April. This would be the first round in a series of discussions on the topics of trade, a joint infrastructure project and defence against North Korea’s ballistic missile program.