Good morning,

Dollar back and forth

Yesterday’s markets, if I can borrow a phrase from association football, was a game of two halves. The morning session was characterised by dollar weakness as traders continued to digest the impact and noises of the Federal Reserve meeting on Wednesday night. Emerging market assets rallied with commodities drawing higher with global equity markets a sea of green.

As the European session drew to a close however the USD managed to pick up some resilience and as we open up this Friday morning, a couple of crosses are looking vulnerable to additional USD strength.

Johnson and May squabble over Article 50

GBPUSD is one of them and the pressure comes from further comments on the negotiation timetable with the EU. Boris Johnson, the UK Foreign Secretary, told reporters that the government is working towards triggering Article 50 by early 2017 and that while there is a 2 year deadline between triggering the Article and having to have all our ducks in a row, Johnson doesn’t think that it will “necessarily need to spend a full two years but let’s see how we go.”

Within the hour, Johnson had been roundly admonished by No.10 with a spokesperson declining to back up the Foreign Secretary’s calls.

Sterling to react but not yet

As we said earlier in the week following the leaks from the EU leaders meeting in Bratislava, we think that there is little impact on sterling from the Article 50 timing calls until it actually happens and once it does, it will largely depend on whether it is believed that the UK is in a strong enough position to withdraw within that 2 year time frame that Article 50 affords.

As it stands at the moment, options markets that look at the cost of hedging against GBP weakness against the USD for 6 months in the future have become more expensive in the past week or so; maybe we are already starting to see investors protecting themselves against an Article 50 driven fall off. NZDUSD fell through the night as traders continued their bets that the Reserve Bank of New Zealand will have to continue to cut interest rates.

Euro quietening on solemn end to the week

The European single currency is once again challenging the Swiss franc but only for the accolade as the most soporific currency within the G10; EURUSD is currently close to its lowest levels of volatility since the single currency was created. Traders are tired of the central bank back and forth it seems, while political risks on both sides of the Atlantic are limiting the desires of market participants as well.

Today will be characterised by data (from Europe) and debate (from the United States). Today’s run of ‘flash’ preliminary PMIs from the Eurozone should allow us an altogether more occluded view of the European economy. Political sentiment can easily cloud PMIs – the Brexit debate is a good example – and so while pronouncements of economic strength may be forthcoming, lingering doubts over the political atmosphere will be a factor.

In the US, three members of the FOMC – Harker, Mester and Lockhart – will speak on a panel later today with Loretta Mester one of the three who on Wednesday voted to raise interest rates this month. To have all on stage may allow for some entertainment as we enter the weekend but if it’s clarity you are looking for, it’s probably best to look elsewhere.

Have a great day and a better weekend.

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