As we enter the last month of what’s been a topsy turvy year, you can’t help but feel 2017 will be remembered as the year of geopolitical uncertainty. In the UK, markets have been hampered by the uncertainty regarding Brexit, and at the alarmingly slow pace at which both parties seem to be progressing on such basic issues like the divorce bill. There are far more intrinsic matters still to come around the movement of people and financial firms being allowed to use passports to access the EU. Over in the US, where it was always going to be an interesting year with Trump at the helm. We have seen plenty of hiring and firing, coupled with threats of nuclear war and disputes among senators on all sides. After the failure of the Obamacare repeal bill, markets began to lose faith Trumps tax reforms, which in turn saw investors lose confidence in the dollar. However, Senator John McCain, yesterday announced that he would support the tax bill, bringing the party closer to the 50 votes needed to get legislation through the Senate. We will be following this progress closely in the coming days.
In the Eurozone, political risk has taken a back foot after some close fought elections this year, this has allowed the single currency to focus on the matters at hand, fundamental economic data. Yesterday we had inflation data miss market expectation slightly, but was inconsequential as far as the market were concerned. We will be monitoring this figure closely however going into the New Year, particularly with QE to start tapering off from January. The unemployment rate fell again last month, and is now a whole 1% better off than where it was this time last year.
In the US, we also had inflation data where the PCE number, the Fed’s most watched inflation measure. Core PCE data came out at 0.2 percent MoM and 1.4 percent YoY, in line with expectation and resulted in dollar selling as hope for future uptick does little to support the cause of the dollar and an uptick in rate hikes for 2018. In terms of EURUSD, the pair continued to trade higher towards the top of the recent larger range but has since peaked out at 1.1935 before some profit taking kicked in. As we discussed in a recent commentary, it is hard to see how EURUSD will continue to appreciate much further and so may represent a good time for dollar buyers to take a look at.
Sterling pairs are showing some interesting developments too. As already reported, this week sterling has surged after a Brexit ‘divorce bill’ settlement was supposedly agreed allowing for the next stages of the negotiations to proceed. However, the next issue of the Irish border is one that is traditionally a political minefield but even more so given the DUP’s position of strength within Westminster. Despite Northern Ireland overwhelmingly supporting Remain in last year’s referendum, the DUP’s views on the border seem to be further hardening and diverging from the Dublin government’s views, who sit alongside the other EU member in negotiations. From a FX perspective, EURGBP moved swiftly lower, however, still remains within that wider range we have consistently flagged of 0.8730 to .9020. Until either side is breached, we expected this range to hold. However, GBPUSD is a different story and broke out, hitting highs of 1.3542.