Daily Market Update

Brexit Progress Lifts GBP to New Highs; U.S. Dollar Down

January 18, 2018

The U.S. Dollar retreated overnight, continuing its decline from Wednesday based on general optimism over growth and monetary tightening in other regions.

USD

Chinese purchases of U.S. treasury bonds fell to a four-month low, perhaps a sign that USD-denominated debt is no as attractive as before.

In regards to political headwinds, Congressional leaders stated that they are very close to signing a one-month deal to keep the government from shutting down while trying to find common ground on issues such as immigration enforcement. The development, perceived as positive, has not helped the dollar.

Economic indicators may also fail to improve the greenback’s prospects as Housing Starts figures from this morning painted a dark picture for the real estate sector. Housing Starts were expected to contract in December by (-1.7) after a major expansion in November, but the fall was deeper at (-8.2%). Additionally, the Capacity Utilization ratio was revealed to be the best since February 2015, meaning that resources are being used maximizing their potential, but this also is not boosting the dollar’s value.

 

EUR

The Euro remained on the rise with a better outlook over German political alliance talks and growth in the price level. Annual inflationary growth stands at 1.4% currently, per Euro-zone Consumer Price Index numbers yesterday. The gradual progress in the price level is a step on the slow path towards ECB tightening, which starts by the Quantitative Easing program coming to a full end in September.

Mixed stock indexes on that side of the Atlantic also kept Euro afloat as a safe asset. It is worth noting that Ewald Nowotny, a veteran ECB policymaker whose statements have moved markets in the past, said that Euro strengthening is not necessarily ideal nor helpful, thus doubling on our sentiment that ECB officials may not always root for the shared currency’s fortunes.

 

GBP

The Pound is finally gaining on worthy news: European officials across the bloc seem determined to reach a trading deal with the U.K. that would mean beating the March 2019 deadline. Current levels are highest for Sterling since the historic referendum, June 23rd, 2016.

Furthermore, policy-makers are gearing up to work on financial terms as well so that the banking sector of Britain is not left in shambles. The optimistic stance comes after talks in the U.K. of a potential launch of another Brexit question referendum, which only exacerbated doubts over political stability.

Instead of all that gloom, we now see a more determined EU that wants to avoid calamity and will try to speed up the process of reforming commercial ties. With shaky situations for leaders in Germany and Italy, it makes sense that others in Spain and the Netherlands are stepping in to say they want to remain a partner of Britain, even if less intertwined.

 

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