Sterling, Canadian Dollar rise on positive Brexit and NAFTA news

March 26, 2018

Once again, currency markets largely sat out the market turmoil brought about by rising fears of a trade war.

While stock markets worldwide slumped in their worst week since 2016 on concerns that China could retaliate to Trump’s tariff plans, most G10 currencies remained fairly range bound with each other. The exceptions were Sterling, supported by the news of an agreement on the Brexit transition deal, and the Canadian Dollar, up sharply on strong inflation data and positive developments regarding NAFTA negotiations.

We now go into the traditionally quiet Easter week. One key data point will be the release of the flash inflation reports for Germany, France and Italy later in the week. Further weakness in inflation could complicate things for the Euro.

 

Major currencies in detail

 

GBP

Sterling’s rebound continued last week amid good news on the Brexit negotiations and a surprisingly hawkish Bank of England vote. The Pound started the week on a strong footing on news that a Brexit transition deal had been agreed to. The UK currency then continued to move higher after two MPC members out of nine dissented from the no change decision during Thursday’s Bank of England meeting and voted for an immediate hike in rates.

These dissents, together with the strong labour data released last week, seem to lock in a hike in the May meeting. We think that Sterling's rally against the Euro still has legs as the markets moves to price in this eventuality.

 

EUR

We are seeing some early warning signs that strong growth in the Eurozone may have peaked. The PMI indices of business activity fell significantly in March, albeit they remain at high levels. The ZEW indicator of investor confidence in Germany also disappointed expectations. It is, however, entirely possible that these confidence indicators are overreacting to the prospect of a trade war and global tariffs, and that we will see these effects fade out as and when the Trump administration gets distracted from its current protectionist bombast. Nevertheless, these two indicators bear close watching.

The Euro, meanwhile, remains firmly stuck in the 1.21 -1.25 trading range. With macroeconomic data sparse in the Eurozone this week, we do not foresee this range to be broken.

 

USD

The Federal Reserve meeting delivered the hike everyone had expected. However, the Fed did not completely live up to the hawkish expectations that had been priced in by the market. Even an increase in the dot plot to project a median of three hikes in 2019 did little to support the Dollar. In the end, however, the announcement of further US tariffs against Chinese goods did strengthen the US Dollar against most emerging market currencies, while it closed the week slightly down against most of its G10 peers.

For this week, it will be key to see if the Dollar starts reacting to movements in risk assets such as stocks. So far, the disconnect between FX and other financial markets has been one of the most surprising features of 2018.

 

OP: https://www.ebury.com/blog/ebury_post/rising-fears-trade-war-marked-last-week/

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