US government shutdown ends, Sterling hits 19 month high

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23 January 2018


The US Dollar had another difficult start to the week on Monday. The currency edged lower against its major peers as the US government remained on shutdown for the second day in a row, although the passing of a temporary funding bill yesterday evening brought the shutdown to an end.

X markets yesterday remained focused on last week’s news that the US Senate had failed to come to a deal on the budget resolution, leading to the first government shutdown in the US in four years. The Senate failed to reach a resolution on a temporary budget, with Democrats refusing to back the deal on concerns over immigration reform. However, President Trump signed the temporary bill last night, which will now keep the government funded until 8th February. The overall impact on the US economy is likely to be minimal as a result.

Economic news out of the US is relatively light on the ground up until Friday, which will see the release of the preliminary GDP estimate for the fourth quarter.

Pound has best run of weekly gains since 2014 on Brexit optimism

Sterling surged to its strongest position in 19 months against the US Dollar on Monday, while rallying to a more than one month high on the Euro. Investors continued to push the Pound higher on growing optimism surrounding the Brexit negotiations, which allowed the currency to post its fifth straight week of gains last week, its longest run since 2014.

Activity should begin to pick up pace in the coming days following a very quiet start to the week. Wednesday morning will see the release of the UK labour report for December, which is expected to show that average earnings excluding bonus accelerated in the final month of last year. Friday’s fourth quarter GDP data is likely to be less encouraging, with a mere 1.5% year-on-year expansion eyed.

Merkel edges closer to forming coalition government

The Euro traded just shy of a three year high against the US Dollar yesterday with broad Dollar weakness and positive noises out of Germany provided decent support for the common currency. The center-left Social Democrats took Germany one step closer to forming a coalition government over the weekend, agreeing to begin formal talks with Chancellor Angela Merkel’s conservatives. While markets breathed a sigh of relief, it could still take a number of weeks for a formal announcement of leadership, with Merkel hopeful to conclude negotiations by 12th February.

This morning will see the release of the monthly economic sentiment index from ZEW at 10:00 UK time, which could provide further support for the Euro if it surprises to the upside. In the absence of any major surprises here, or in tomorrow’s PMI data, the common currency could trade fairly range bound in the next couple of days until Thursday’s crucial ECB meeting.