The main item being talked about at present is the inevitable interest rate hike in the USA, and this has been the cause of the recent realignment of Sterling to a 7week low. The triggering of article 50, must occur within the next 3 weeks, so how low can the pound go, or is this fully factored into the current rates?
The ‘Trump effect’ is having a very positive impact on the US dollar at present, as the executive orders do appear to, at least in the short term, provide a stimulus to the US economy and the Dow has responded in a corresponding manner. However, we are at the beginning of the ‘honeymoon’ and the USA is now downgraded by the Economist Intelligence Unit, to a ‘flawed democracy’ with declining trust and increasing inequality, leading to populist politicians …
2017 starts with much focus on developments in the USA, firstly the Fed reserve’s minutes indicate they are prepared to raise interest rates, three times in 2017, and faster than market players anticipated, this undoubtedly supports the dollar. The other will be the emerging fiscal policy of President elect Trump!
US Dollar strength has pretty much dominated the last month, and with data continuing in a positive tone from the USA, it seems an absolute dead cert that the Fed will raise interest rates in the states in December as planned. In the UK, the Autumn statement was well received, despite a significant gap in the public finances, but encouraged by plans to invest in UK infrastructure, and a settling of sentiment that ‘life after Brexit’ will continue!
Sterling down 4% again this past month against both € and $, is for our UK clients masking some favourable market movements. The Eurozone is bolstered by the roaring economy of Germany, that continues to support the zone, whilst the divergence from other countries challenges ECB policy and complicates the EU way forward …
Brexit continues to be the over-riding sentiment impacting Sterling exchange rates at present. Will there be further interest cuts, what about more QE? Will it be a hard Brexit, impacting the financial services sector, or a softer more accommodating agreement?
Another month where all three primary currencies are basically at the same place they started the last couple of months at. There have been reasonably fluctuations, or trading range, within the month, but fundamentally we are in a stable phase at these levels post Brexit. From a UK perspective, all await information on how the economy has performed in the weeks since the referendum.
A firmer tone is entering most markets now as we approach harvest. This should be fully expected since we have been at historic lows for most items. A mixture of poorer weather and farmers looking to alternate better paying crops, after the low prices, seem to be the main drivers.
All we can really state is volatility, with perhaps more Euro weakness than some anticipate, and this may well impact on the Euro/USD relationship too. We are seeing unexpected firmness in some organic seeds ranges at present, so would suggest cover is taken through until the end of 2016, and into new crop arrivals into the UK/EU. With conventional seeds generally at low points in historical terms, we do feel prices are more likely to increase than decrease, so urge buyers to cover what they can.
Brexit dominates Sterling at present and will obviously continue to do so, until after 23rd June, when it is sure to move somewhere. Between now and then, expect volatility against US$ and €. The euro is trading at 3 month lows, and with deflation still a strong risk, and virtually zero interest rates, the focus is likely to switch to encouraging bank lending to boost exports & inflation.