Lack of clarity on future policy slams US Dollar, Sterling; markets nervously await May speech on Brexit

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16 January 2017

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

The US Dollar had rallied since the US election on vague notions that the incoming Administration would add fiscal stimulus to the economy.

he failure of Trump’s press conference to add any clarity whatsoever as to future policies was seen by traders as a US Dollar negative. The greenback fell against every other G10 currency with a glaring exception: Sterling, which was hammered by increasing fears for a hard Brexit that will end UK access to the common market.

Last week worst performer by far was however the Turkish Lira, down a whopping 5% against the Euro. The sell off was triggered by S&P’s concerns over the vulnerability of TRY macroeconomic and financial background, a concern which we share fully.

This week presents a packed calendar for FX markets. Of course, the focus will be on Tuesday speech by Theresa May, where she has promised to clarify her stance in Brexit negotiations. Also affecting the Pound is the possibility of a Supreme Court ruling on the triggering of Article 50. The ECB meeting on Thursday should be a non event, as President Draghi will simply reiterate the message from the previous meeting. Finally, markets will hang on to every detail that the incoming US administration may choose to share regarding future economic policies.

Major currencies in detail


Yet another positive surprise in UK macroeconomic news, this time industrial production, did little to support the Pound last week. Sterling continues to trade exclusively in reaction to markets fear of a hard Brexit, where the UK loses access to the common market and ends up renegotiating a UK-EU trade agreement from a position of weakness. This week will if anything be even more volatile, on Tuesday we get a critical speech by the Prime Minister on Brexit. There is also the possibility of a Supreme Court ruling on the triggering of Article 50. There is a small chance that it would require approval from the devolved parliaments, which would at the very least delay the action significantly and bring about a sharp Pound rally. We’d certainly recommend hedging exposure to Sterling in either direction no later than Monday, as we are expecting a roller coaster of the Pound starting Tuesday.


The strong undercurrent of positive economic surprises out of the Eurozone continued last week. However, the political calendar dominated FX trading, and the common currency rose largely in response to negative political developments in the US and the UK. This week should be no different, in spite of the ECB meeting on Thursday. We expect the Governing Council to essentially reiterate December’s message, and President Draghi to emphasise that the central bank is now on a wait and see mode, trying to ascertain the effects of Euro devaluation and extraordinary monetary stimulus in the Eurozone economy before making any changes to either policy or communications to markets


This week may also be a volatile one for the US Dollar. The important inflation release on Tuesday will actually be overshadowed by Chair Yellen’s expected statements on a group discussing on Wednesday and, most importantly, by Trump’s inauguration on Friday. There is always the chance that he will flesh out the general direction of economic policy under his Administration. At any rate, the speech will come around European market close, so expect much volatility late Friday as traders attempt to square off position in reaction to the speech going into the weekend.