Market News & Insights
24 January 2017

Politics Continue To Drive Markets

The theme of politics driving financial markets is one that we have heard plenty of times already in the past year and is likely to continue for the foreseeable future, making the normally difficult forecasting models even more tricky to use with any degree of confidence levels. As we know, the two major stories are that of the UK and across the pond in the US. Firstly, closer to home we have the Supreme Court ruling later this morning, determining the Parliament’s role in the Brexit process. The court’s 11 judges are due to give their verdict on a government appeal against a High Court decision that PM May should seek the approval of lawmakers before formally starting Britain’s withdrawal from the European Union. The ruling will be announced at 9.30am. This one time key event importance, has lessened in recent days after May during her speech stated that she will be going to Parliament now anyway. The significance of this ruling is likely to drive the soft Vs hard Brexit approach that has been much discussed in recent weeks. From a FX markets perspective, this soft/hard line has had a huge impact on the value of sterling, with the softer approach seen as favourable for the pound. For example, after her speech last week and comments on getting Parliament’s approval, sterling had its largest single day rally against the US Dollar in 24 years. Ahead of the ruling, sterling continues to trade on a firmer footing, trading at one month highs against the US Dollar, hitting 1.2546 highs overnight – although back trading in the 1.2480 territory this morning. Versus the single currency, the pound traded stronger overnight too with EURGBP hitting lows of .8582 (GBPEUR 1.1652). However, EURGBP whilst lower, is still above some key support lines with the 100 Day Moving Average of .8548, the 50% post Brexit High/Low retracement of .8517 and then the 200 DMA at .8412. So whilst sterling is firmer, it still needs to sustain a break of a number of key levels.

The other dominant political story of course is how the markets are reacting to new ‘regime’ in the US. As we have highlighted on several occasions here, the recent dollar strength was underpinned by both the belief of further Fed rate hikes and new Fiscal stimulus by President Trump. For the former, we have argued that the Fed needed an almost perfect economic picture to justify the two to three rate hikes during 2017. The other factor was based on post-election victory comments by Trump on his spending plans. So far though, we haven’t seen or heard of any of these details, with his attention focusing elsewhere for now. The dollar has also been impacted by comments made by the Treasury Secretary nominee Steven Mnuchin about the dollar’s strength. After falling for 4 straight weeks, the US Dollar Index remains unchanged as markets await further details on Trumps’ plans. From a EURUSD perspective, this remains unchanged too, with the pair trading in a tight 1.0720 to 1.0760 range so far this week.