Good morning,

USD: What the boss wants

Following a week of dollar falls driven by US trade policy announcements, the dollar bounced back slightly overnight after comments from President Trump. Donald Trump told the crowd at the Davos: “The dollar is going to get stronger and stronger and ultimately I want to see a strong dollar.”

USD was afforded only a little bit of upside and is back on its heels this morning. Ultimately the path of the dollar is set by the market and not what President Trump nor Secretary Mnuchin want to see from it; we believe Trump is a fan of low interest rates given his real estate background and therefore squaring the circle of strong dollar/low rates leaves us puzzled.

Trade policy is now almost as important to the US dollar as interest rate policy from the Federal Reserve. Countries that have large trade relations with the US are set to see their currencies remain volatile as a result of concerns over further trade sanctions.

The larger impact in terms of currency volatility would come from the US denoting China, or another Asian exporter, as a currency manipulator in its semi-annual Treasury reports on the matter. In its October report on the FX policies of the United States’ largest trading partners, the US Treasury included China, Japan, Korea, Germany and Switzerland on its monitor list of countries with “unfair” currency practices. India was also noted whilst Taiwan was removed.

Any currency that is tagged as being manipulated can, and likely would, have sanctions and tariffs imposed upon it, and these can be done unilaterally by the President without Congressional approval. The next one is due in April.

Trump will address the Davos crowd later today

EUR: Happy for now to let the euro run

The ECB left policy unchanged yesterday but all eyes were on how President Draghi might verbally intervene to forestall the recent strength of the European single currency. Markets were disappointed in his comments that “volatility creates uncertainty” and took EURUSD above 1.25 for the first time in three years.

Other language was also not enough to move traders away from pricing in a more aggressive European Central Bank in the next 12 months than we are comfortable with. How the European data picture evolves will determine who is right.

GBP: GDP due

Mark Carney delivered some bullet point updates yesterday in Davos. Tying in with today’s GDP release at 09:30, Mr Carney said that the UK economy was feeling the short-term effects of Brexit and that GDP was a whole percentage point behind the pre-Brexit indicators. Despite the underlying negative tone, GBPUSD rallied 100 pips and GBPEUR moved higher to 1.15 – 0.8695 in EURGBP terms.

Year on year, the UK economy growth rate is expected to have shrunk from 1.7% to 1.4%, whilst Q4 is expected to hold at 0.4%. This is the first reading of Q4 data and therefore revisions are more than likely.

Philip Hammond’s comments yesterday on soft Brexit were not well received by his Tory peers, claiming that he is missing the whole point of Brexit, and the various opportunities that possibly await. He later rowed back his comments but not before being slapped on the wrist by No.10. Rumours of a leadership contest are rippling round the Westminster village at the moment.

Have a great day and a better weekend

Jeremy Cook, Chief Economist