Sterling Up but Volatility Expected
The Pound rallied against the US Dollar and the Euro, despite Theresa May and Arlene Foster’s unfinished business regarding the issue of the Irish border. Michel Barnier, the chief EU negotiator, said to EU ambassadors that the British government has been given 48 hours to present a text on a potential deal. He added that the British prime minister is working on a proposal that could give a solution to the DUP’s concerns.
EU leaders told Barnier that, in case the UK doesn’t come to a joint agreement with the European Commission (EC) by Friday night, it would mean that there is insufficient progress and the terms of a transition period would have to be discussed in March’s EU Summit. In the US, President Trump recognised Jerusalem as Israel’s capital in a move that has upset enemies and allies and is threatening to destabilise the area.
Pound Sterling – UK Markets
Today, the Pound strengthened against the US Dollar with the exchange rate set at $1.33. Sterling edged up against the Euro with the exchange rate set at €1.13.
A survey by the British Chambers of Commerce (BCC) showed that the majority of UK businesses expect their costs to rise because of the weak Pound. Despite the fact that rising costs would probably affect their profits, 46% of businesses that participated in the survey did nothing to mitigate currency fluctuation risks. Especially smaller firms were shown to be less inclined to use hedging to manage their exposure to currency risks. BCC’s director general, Adam Marshall, urged UK firms to take the necessary steps to prepare for any Brexit outcome.
In the morning, Halifax bank released data regarding house prices in November. The Halifax survey indicated that UK home prices increased by 0.5% in November, on a month-to-month basis. The result surpassed expectations for a 0.2% rise. This has been the fifth consecutive month that prices have increased. Halifax CEO Jonathan Samuels noted that last month’s interest rate hike by the Bank of England (BoE) seems to have ignited demand since many buyers want to take advantage of the still low interest rates.
US Dollar – US Markets
The US Dollar surged against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY), which measures the strength of the Dollar against six major currencies, moved higher coming in at 93.61.
A Reuters poll showed that a slight majority of currency strategists surveyed said that if the final tax bill is close to the one that has been leaked to the media, it ought to support the US Dollar beyond a year from now. The Dollar has lost over 9% in the DXY Index, which is the worst yearly performance since 2003. BBVA strategists expressed the opinion that, in case the reform is approved, there will be a slightly positive economic impact which could help to contain the Dollar’s weakening.
Westpac economists noted in a report that the authors of the tax reform bill are focusing on how they are going to treat the repatriation of corporate earnings. The Senate wants to impose a 14.5% tax on liquid assets and 7.5% on non-liquid holdings. The House calls for a 14% and 7% tax, respectively. The report suggests that the US tax system would become territorial, ending the practice of taxing global income via a tax exemption for income/dividends paid from the overseas subsidiary firm to the US parent company.
Euro – European Markets
The Euro lost ground against the US Dollar with the exchange rate set just under the $1.18 mark. The release of the Eurozone’s GDP data for the third quarter of the year dominated the news coming from Europe.
Eurostat data showed that the Eurozone’s GDP grew, on an annualised basis, by 2.6% in the third quarter of 2017, surpassing expectations for a rise by 2.5%. On a quarter-to-quarter basis, the Euro-bloc’s GDP rose by 0.6%, in line with analysts’ expectations. Unemployment rate in Greece fell to 20.5% in September, down from 20.7% recorded in August. In France, October’s trade deficit came in larger than anticipated as imports increased by 1.1% and exports by 0.4%, on a monthly basis.
The German industrial production slumped in October, according to data published this morning. Industrial production in the strongest economy of Europe declined by 1.4%, on a monthly basis, instead of rising by 1.0% as analysts had been anticipating. On an annualised basis, industrial production increased by 2.7%, which was much lower than the 4.3% expected figure. An ING report said that “as strange as it may sound, October’s drop is the result of public holidays and long weekends.”
Other Currencies – Highlights
Sterling edged up against the Australian Dollar, trading at 1.77 AUD. The Aussie fell when a report by the Australian Bureau of Statistics (ABS) indicated that the country’s trade surplus in October stood at $105m, shrinking dramatically when compared with September’s $1.6bn and missing expectations. Australian exports slid by 3%, while imports increased by 2%. Iron ore sales slumped by 10% and coal exports declined by 3%.
The Pound rallied against the New Zealand Dollar, trading at 1.95 NZD. Westpac analysts said in a report that the Kiwi economy “is in for a big shake up over the next few years.” They noted that businesses are feeling nervous since the housing market is cooling down and construction activity is slowing. The Westpac report predicts that the Reserve Bank of New Zealand (RBNZ) will be disappointed by the GDP growth in 2018 and will become more dovish over time.
Sterling moved higher against the Swiss Franc, trading at 1.32 CHF. The unemployment rate in Switzerland fell to 3.0% in October, beating expectations.