Pound falls from two week high as US Dollar resumes rally

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29 November 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling slumped from a two week high against the US Dollar yesterday, erasing almost the entirety of its gains from last week in a matter of hours.

T
he Pound’s relatively steep fall came after a report released yesterday morning brought to light another legal obstacle to the Brexit process, Article 127. Lawyers have claimed that the UK government will have to organise an exit from the European Economic Area (EEA), separate to its department from the European Union. While this was denied by government, investors reacted badly to the prospect of a prolonged period of uncertainty.

Meanwhile, the Euro resumed its downward trend against the US Dollar during London trading. The single currency had earlier taken some heart from the result of France’s Les Republicans primary vote late on Sunday night that yielded a comfortable victory for former Prime Minister Francois Fillon.

Fillon, who claimed around two-thirds of the vote over the weekend, is now clear favourite to be named President of France next year. A recent opinion poll suggested he would easily beat right-wing National Front leader Marine Le Pen in a run-off second round vote, set to take place in May. Investors have been concerned in recent weeks that a victory for the Eurosceptic Le Pen could threaten the country’s future within the European Union.

Elsewhere, the South African Rand soared by the most in the world against the US Dollar after ratings agencies Moody’s and Fitch both reaffirmed the country’s investment grade credit rating.

Tuesday should be a much busier day in the currency markets following yesterday’s relatively quiet day of economic and political news. Revised third quarter GDP numbers out of the US will be the main announcement today when released at 13:30 UK time. Senior Federal Reserve member William Dudley will also be speaking today.

Major currencies in detail

GBP

Sterling fell 0.75% against the US Dollar yesterday following the release of the report on Article 127.

Bank of England rate setter Gerjan Vlieghe, one of the more dovish members on the monetary policy committee, claimed yesterday that it would be best for the central bank to keep rates on hold. Speaking at Sheffield University, he claimed that the current economic outlook and level of Sterling, which has fallen over 16% since the Brexit vote, would be best served by keeping interest rates where they are now. He also argued that low interest rates around the world, such as that employed in the UK, were the result of the global economic problems and not the cause.

With Sterling continuing to be driven by politics and almost nothing else, economic news out this week are unlikely to receive too much attention.

EUR

Overnight gains for the Euro proved short, with the currency falling 0.7% and slipping back to around Friday’s close.

ECB President Mario Draghi spoke at the European Union Parliament committee in Frankfurt yesterday, although added no new policy news. He claimed the Eurozone economy was proving resilient and is expected to recover at a steady pace due to the central bank’s stimulus programme.

German inflation data this afternoon should give us a decent indication as to the strength of tomorrow’s Euro-wide inflation numbers.

Investors will also be heavily focusing on this weekend’s constitutional referendum in Italy. Italy’s Prime Minister Matteo Renzi has vowed to resign should the ‘no’ vote prevail. Predict, where users bet on the outcome of political events, currently puts the chances of a ‘yes’ vote at 20%.

USD

The Dollar recovered all of its losses during Asian trading yesterday to end the London session 0.5% higher.

The greenback received a further boost yesterday from revised growth forecasts by the OECD, which suggested that the world’s largest economy would pick up pace next year following Donald Trump’s election victory. The economy is now expected to grow by 2.3% in 2017 compared to the previous 2.1% estimate, with Trump expected to ramp up fiscal spending and cut taxes.

This afternoon’s revised GDP numbers will be the highlight in the US today. Consumer confidence data at 15:00 UK time is expected to show a modest increase on previous.

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