Currencies worldwide soar against dollar as trade conflict and Brexit head for resolution

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16 December 2019

thomasdodds

Every major piece of news in an eventful week went the right way for financial markets and risk appetite.

T
he Tories’ crushing victory in the UK general election lifted sterling and British assets, with the news of an initial deal between the US and China on trade adding to the general optimism. The Federal Reserve appears to be firmly on hold after its December meeting, and the overall result was a general rally of every major currency against the US dollar, save the yen.

This week promises to be a busy one in currency markets. The key flash PMIs of business activity in the Eurozone come out on Monday. Thursday we will see the Bank of England reaction to the new political landscape after the UK election. Finally, we’ll see some important inflation data out of the US on Friday. We expect generally positive releases throughout the week that may well continue to lift sterling on one hand and emerging market currencies on the other.

GBP

The pound rallied sharply after the historic Tory victory at Thursday’s election on relief that the withdrawal agreement may finally pass Parliament.

This does not fully remove the uncertainty over the future relationship between the UK and the EU, which remains to be negotiated before the end of the transition period on 31st December 2020. A large Tory majority does, however, almost certainly ensure that any agreement reached by Johson’s government will be able to pass Parliament.

We now expect the Bank of England to upgrade its assessment of the UK economy’s future path, which may well provide a modest further impulse to the Pound before year-end.

EUR

The ECB under Lagarde’s leadership appears to be inching close to our own relatively optimistic view of the Eurozone economy. At its December meeting, macroeconomic projections were revised slightly upwards. President Lagarde also struck a distinctly optimistic tone in her press conference.

The tentative resolution of the US-China trade conflict can only add to this sense of optimism. We expect forward-looking confidence indicators like the PMIs to surprise to the upside. Further, the apparent turn of the German economic establishment towards a more tolerant view of fiscal stimulus is yet another positive for the euro going forward.

USD

The Federal Reserve made it clear at its December meeting that it is firmly on hold, and that the bar for an interest rate move in either direction is fairly high. The China-US agreement on the first phase of a trade agreement makes it even more unlikely that we see a cut any time soon. Meanwhile, the continued absence of inflationary pressures makes hikes unnecessary.

Steady US monetary policy and improving newsflow in Europe and worldwide is, in our view, a positive environment both for the euro and emerging market currencies. Continued gradual rises in both appear to be the most likely theme of currency markets in 2020.