A Tale of Two Currencies – Trump and May

Many factors determine how currencies trade in the forex markets – a broad classification can group such factors into technical factors and fundamental factors. The technical factors include volume, momentum and moving averages among others while fundamental factors are closely linked to economic policies and geopolitical concerns. However, a third often overlooked factor also exert an equally significant pressure on currencies – that is the speculator factor.

In the recent past, many currencies in the forex markets have recorded gains and losses in response to speculations about events in the political and economic landscapes. The United States Dollar (USD) and Great Britain Pound (GBP) in particular have had an interesting performance in the forex markets in the last couple weeks in response to the words of politicians in the U.S. and the UK.

Donald Trump’s words weaken the USD

Donald Trump’s words has an ability to move the stocks markets; after all,  U.S. stock indexes have soared towards record highs after his victory at the polls in sharp contrast to analysts’ forecast of a market crash. However, not many people expected Trump’s words to have an equally strong effect on the forex markets to determine how the dollar trades in relation to other currencies.

In an interview with Wall Street Journal on January 16 Trump expressed his views on a plethora of economic issues – China and the U.S. dollar eventually came up for discussion. Trump noted that American firm’s can’t compete effectively against Chinese firms in the global market. In his words, “our companies can’t compete with them now because our currency is too strong. And it’s killing us.”

Interestingly, the media had a field day quoting and spinning those words out of context. Most headlines that carried the story only said, “our currency is too strong. And it’s killing us.” Forex traders didn’t need any further clue to deduce that Trump might be planning to weaken the USD; hence, they started unloading the bullish USD bets. Walter Stawski, analyst at TradePlus observes that “the marked decline in the value of the USD after Trump’s remark is not an happenstance, FX investors often take the words of government officials on foreign exchange rates seriously.”

The day after the news of Trump’s words broke; the U.S. Dollar Index lost 1% to 100.51.The remarks that Trump made also caused rival currencies to build strength against the USD. The Euro (EUR) gained 0.8% against the USD to 1.0688, the Japanese Yen (JPY) gained 0.6% against the USD to 113.55, and the Mexican Peso gained 0.7% against the USD to 21.5946.

Today, markets anticipate to Yellen’s speech and Donald Trump inauguration implications. US Dollar index climbs 0.54% and the greenback strengthening after five negative trading days.

Theresa May’s words lift the GBP

British Prime minister, Theresa May is saddled with the responsibility of negotiating the terms of Britain’s exit from the EU after last year’s Brexit vote. On January 17, Theresa May gave a speech detailing the UK’s government plan push for parliament’s vote on final Brexit deal. She also provided a 12-point plan for Brexit in which Britain will get a clean break from EU membership opposed to the ‘half-in, half-out’ expectations of pundits.

Interestingly, the Great Britain Pound (GBP) had started a clean break away from the bearish sentiments that has kept it depressed in the forex markets since the Brexit vote last year. Pound recorded its best day since October 2008 after Theresa May presented her 12-point plan. The GBP soared in a massive rally in which it ended the session with 2.61% gains at $1.2383. Market watchers expect the GBP to soar higher in the next couple of days weeks as Theresa May sends out a clear message that she will push for the best deal for the UK. The cable is trading 1.02% down as markets await US economic data and Trump’s new policies.

Nonetheless, market bears have opined that it is too early to celebrate the gains in the Pound because the GBP is still about 16% off its pre-Brexit value in the forex markets. However, Stephanie Flanders, Chief Market Strategist for the UK and Europe, JPMorgan Asset Management, said “the positive market reaction to the speech suggests that any concern about the content of the speech has been outweighed by relief that it was delivered at all.”