7th February 2017 Market Update
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?? GBP – The pound continues to swim against the tide, with markets seeming happy to adopt a ‘wait and see’ approach. The Bank of England is clearly sitting on the fence with regards to policy, ready to respond in either direction. With no clear central strategy as guidance, markets will likely wait to see how Brexit negotiations pan out. With no sterling data out yesterday, the pound lost ground across the board.
?? EUR – With little economic data, the day’s focus was honed on ECB President Mario Draghi’s speech. He stated that underlying inflation pressures remain subdued and that the Governing Council is ready to increase the size and duration of its asset purchase programme. Draghi confirmed a QE pace of €60bn per month from April to December 2017. With strong German factory orders, the euro made gains against the pound, though lost ground from Friday against the US dollar.
?? USD – With a virtually empty economic calendar, the greenback nonetheless made gains versus the pound and euro. On the sterling side, this could be due to the Prime Minister’s spokeswoman stating that the government will not allow any Brexit legislation that attempts to keep Britain inside the EU. Dollar gains versus the euro can almost certainly be attributed to Mario Draghi’s somewhat dovish tone in his speech today.
1.30pm: Trade balance: The deficit is forecasted to reduce to US$45bn from US$45.2bn.
Our View: There is little doubt that investors are currently reluctant to commit to sterling, until a clearer Brexit picture emerges. The triggering of Article 50 could see the pound take another short, sharp hit but it is entirely possible that subsequent positive negotiations will provide a boost to sterling. The currency remains undervalued, wholly because of Brexit uncertainty. Any positive negotiation leaks should give a much needed fillip to the pound. In the short term, the currency is likely to remain under the cosh.
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