The Risk Pendulum, the Dollar and the Pound

The markets remain in pendulum motion going into the 3^rd day of the week, sentiment towards the majors being driven by the risk on, risk off swings that have become customary going into the New Year, though this time, the markets are not able to lay the blame at the feet of the Chinese economy going into the Chinese New Year, Trump and Theresa May tag teaming, with agendas not completely dissimilar, an intention to give the people on either side of the pond the best that can be given.

While the markets shudder at Trump’s skills at the podium, Therese May certainly delivered a more acceptable speech on Tuesday morning that saw the pound rally, driving cable to $1.24 levels by the close, the substantial 3.05% gain stemming from the Prime Minister’s agreement to pass the final terms of Brexit through a parliamentary vote.

The obsession over whether we will be seeing a hard or soft-Brexit is quite perplexing when considering the fact that the British government will ultimately be seeking a completely new relationship with the EU, so leaving access to the single markets behind and protecting one’s borders a given upon departure.

The moves ultimately mean that the pound will remain beholden to market sentiment over whether it’s going to be a hard or soft Brexit come 2018, assuming the May’s timelines are reasonable.

That leaves the markets in somewhat of a quandary for the coming 26 months, though we would expect things to settle over the near term and for the volatility to begin building as negotiations commence. The moves between now and the first agreements coming through likely to be more hinged on the direction of the UK economy, sentiment towards monetary policy with some consideration of how the markets feel that the UK government will fair in its objectives laid out on Tuesday evening.

The gains in the pound were certainly on the excessive side on Tuesday, but that is not to say that we don’t expect similar moves in the coming months, key macroeconomic data out of the UK including this morning’s employment figures and Friday’s retail sales figures for December, likely to influence BoE sentiment towards monetary policy.

Following a pickup in the rate of inflation in December, figures released yesterday morning, stats reflective of stability in the labour market this morning will add fuel to the rate hike fire, the BoE governor concerned with an easing in consumer spending amidst rising prices. The negative sentiment will certain soften after this morning’s figures are positive and retail sales figures on Friday continue to reflect UK consumers being relentless in their desire to ignore last June’s referendum and the doom and gloom that had been forecasted in the economy thereafter.

The pound has eased off Tuesday’s highs, though the slide in cable is likely to be more to do with this afternoon’s December inflation figures out of the U.S, any acceleration in the rate of inflation providing more reason for the FED to take a more hawkish outlook on monetary policy, though until Trump’s cards are revealed, the FED’s hands are likely to remain tied, FOMC members through the week erring on the side of caution, vis-à-vis monetary policy, this being in spite of a continuing pickup in the U.S economy.

There may be a few who wished that Trump would be able to deliver similar speeches to that of May, but in the end, it’s not just a matter of taste but effectiveness, both green around the edges, when considering the tasks at hand.

The British government has laid its cards on the table and, following a 2-month rally off the back of Trump’s post-election rhetoric, it’s now time to get down to the nitty gritty, U.S policies.

Gold eased just 0.34% through the early part of the day, largely reflecting the reality that the demand for the safe havens was more driven by jitters over Trump’s inauguration speech, gold having gained 1.27% on Tuesday, with the Yen easing 0.57% against the Dollar, appetite for the Dollar having been on the rise through the early part of the day, ahead of today’s U.S December inflation figures and Yellen speech, with further gains expected as the markets look to shake off the fears and focus on the macroeconomics and ultimately what Trump is likely to deliver, rhetoric aside.

Uncertainty over what and how Trump will deliver on Friday will continue to influence through the remainder of the week, the only question being whether geo-political risk will overshadow the positive outlook for the U.S economy, the markets fully aware that, the more inconsistent the president-elect is, the more uncertain the FED will become. It may well ultimately boil down to what Trump decides to share with the markets between now and Friday.

At the time of the report, cable is down 0.76% at $1.23197, though the pound is likely to be in its own world, economic data came out positively this morning, with the Dollar Spot sitting at 100.61, up 0.35% at the time of the report, today’s stats and Yellen’s commentary a consideration for the markets.