Good morning,

USD: Talking it down

Following on from the imposition of tariffs on washing machines and solar panels on Monday, notes from Commerce and Treasury Secretaries Ross and Mnuchin upped the rhetoric around antagonistic trade policies from the US. In Davos yesterday morning Ross said:

“Trade wars are fought every single day. . . And unfortunately every single day, there are also various parties violating the rules and trying to take unfair advantage. So trade wars have been in place for quite a little while; the difference is the US troops are now coming to the ramparts”.

Dollar weakness 

Mnuchin has also backed away from the long-held US policy of at least talking about a strong dollar.

“The dollar is one of the most liquid markets. Where it is in the short term is not a concern for us at all. A weaker dollar is good for us as it relates to trade and opportunities. Longer term, the strength of the dollar is a reflection of the strength of the US economy and that it is, and will continue to be, the primary reserve currency”.

This was all the impetus that the US dollar needed to crack lower across the board. GBP has now risen over 5% against the USD, with the euro gaining 3.3%.

As we have said before, we have to wonder how long this dollar weakness will last given what it means for the wider world. Emerging market governments may like a weaker dollar as external debt financing and the repayments are therefore cheaper, however, if the buying power of the average US consumer is lessened then the market for emerging market exports dries up.

If the weaker USD does prompt inflation pressures then the Fed’s reaction of raising rates could stabilise the dollar. For now, however the USD sell off looks set to continue.

GBP: Jobs boosts sterling

Yesterday’s jobs report added to the GBP outperformance yesterday. All in all, it was a strong report; wages are a little higher, employment is at a record high following a slight blip in October and with recent reports showing productivity is higher than expected and inflation is coming away from the highs, there is cause for a little short term optimism.

Of course, many headwinds remain but the higher pound may be enough to convince employers that margins that had been hurt by higher input costs may soon be able to sustain stronger wage settlements. Wages remain the silver bullet for the UK economy.

EUR: European Central Bank meeting today

Data also set up the EUR to gain against the US dollar with German, French and wider Eurozone preliminary PMIs all cracking higher ahead of this afternoon’s European Central Bank meeting. December’s meeting was interpreted hawkishly by markets and data since has heightened expectations that we could be getting closer to the point that the central bank decides to announce an end to QE and refocus investors on when interest rates may rise.

ECB president Draghi rarely leans hawkishly however in his press conference and we will be watching intently to see whether he wishes to deflate the euro from its elevated position. He speaks at 13.30 GMT

Have a great day

Jeremy Cook, Chief Economist