US Trade war suspended but UK Brexit hots up

US Dollar Highlights

• Who will gain most from trade war suspension?

• Fed hints at December interest rate rise

• Pound and UK economy buffeted by Brexit

 

Sterling - US Dollar (GBPUSD) FX Technical Analysis

Unlike other major currency pairings in November, where GBP has succumbed to one long fall, against the US Dollar, the Pound has suffered a series of downward steps, but the end result has been the same – with Sterling seeing a significant decline in value.

The monthly high for the pair in typical mid-market rates came back on 7th November at 1.316, while the low of 1.270 was reached on 3rd December. Each week, the Pound clawed back a little territory against the US Dollar, before falling back again. The latest gain for the US Dollar has come after President Trump announced a 30-day lull in the trade war with China, while the two sides get together and talk, while the Pound is buffeted around by Brexit.

Who will gain most from trade war suspension?

While it is good news for the global economy that the US and China trade wars have been halted, at least temporarily, what is unclear is which side stands the most to gain from the stand-off and whether any further progress can be made. Hopes that the G20 meeting in Argentina would provide the ideal opportunity for US President Donald Trump and Chinese President Xi Jinping to negotiate a pause for breath in the trade wars came to fruition. After meeting for two-and-a-half hours in Buenos Aires, the two sides agreed to put any new action on hold for 90 days, so they could talk further.

The suspension means at least a postponement of the planned increase in tariffs on $200 billion of Chinese goods from 10%-25% that were due to be introduced on 1st January 2019. President Trump sounded optimistic about the step, tweeting " Relations with China have taken a BIG leap forward! Very good things will happen. We are dealing from great strength, but China likewise has much to gain if and when a deal is completed. Level the field!"

The foreign exchange markets initially greeted the news as positive, with the US Dollar making small gains against major pairings including the Pound. Of course, this only temporarily prevents new tariffs, it doesn’t mean the trade disputes between the two superpowers will necessarily be solved for good. China’s economy has been showing strain, with the weakest growth in Gross Domestic Product of 6.5%, since the global financial crash and November’s Manufacturing Purchasing Managers’ Index (PMI) falling to 50.0, below expectations and on the edge of contracting, as a score below 50 indicates. But, in reality, it has done little to end what the US calls unfair trade practices and intellectual property theft. China is concerned at the US relationship with Taiwan, which it sees as a rogue province,  and increasing military action in the South China Sea. The two sides have much to talk about in those 90 days!

Fed hints at December interest rate rise

Federal Open Market Committee (FOMC) members, who set interest rates, have hinted at an imminent 0.25% rise in the US benchmark interest rate – and it could come as early as this month. The minutes says, “Consistent with their judgment that a gradual approach to policy normalization remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations.”

However, the committee also expressed concerns about trade tensions and corporate debt on growth – although this was before the 90-day halt in the US-China trade war. In addition, the committee is mulling over more interest rises in 2019, if conditions permit. Currently, the US economy is performing well, with Gross Domestic Product (GDP) up 3.5% year-on-year in Quarter 3, 2018, slower than the 4.2% in the second quarter, but still on track to meet President Trump’s full-year target of 3%. Unemployment is at 3.7%, the lowest rate since way back in 1969. The committee next meets on 12th-13th December.

Pound and UK economy buffeted by Brexit

While nowhere near as strong as the US economy, UK GDP had its best showing for nearly two years in Quarter 3, 2018, rising 0.6% over the previous quarter and 1.5% up year-on-year. However, that could be the last piece of good news for some time. Most of the growth came in July, when England was enjoying a decent football World Cup run and warm weather boosted retail sales and the construction industry. However, the National Institute of Economic and Social Research (NIESR) predicts that the UK economy will grow just 0.4% in the last three months of the year. In the event of a soft Brexit, things could be worse, with the UK economy performing worse than any country in Europe at 1.1% in 2019 and 2020, according to European Commission forecasts.

A no-deal Brexit is set to be even more damaging, with Bank of England Governor Mark Carney warning that in a worst-case scenario, the UK economy could fall back by 8% after Britain leaves Europe, with the Pound dropping 25% and house prices down almost a third. The uncertainty over Brexit is still dragging down the Pound against the US Dollar.

The good news is that the European Union has finally approved a Brexit deal. The 585-page withdrawal agreement covers citizens’ rights, the ‘divorce’ payment and the controversial ‘backstop’ for the Irish border, which seeks to retain an open border on Ireland in the event of a no-deal Brexit. The bad news is that the arrangements are deeply unpopular with MPs, who are voting on the measure on Tuesday 11th December. Since the terms of the agreement, were first made public, there have been a handful of resignations by Government ministers.

In addition, disgruntled Conservative MPs have been calling for a vote of no confidence in Mrs May, which can be actioned when 48 letters are sent to the backbench body, the 1922 committee. But at time of writing, the rebels remain short of their target and Theresa May clings on to power. If the deal fails, it is anybody’s guess what happens next. Mrs May could amend the agreement and with the support of the EU and the cabinet, bring back a revised deal to Parliament.

On the other hand, Britain could leave the European Union on 29th March 2019 with no agreement. If more unhappy MPs write to the 1922 committee, Theresa May could face that no-confidence vote and a leadership contest, or she could resign and call a general election. In the meantime, some MPs are angry that only a summary of the government’s legal advice concerning the Brexit deal has been published, rather than the full guidance. MPs previously required the government to lay before Parliament "any legal advice in full", but the government says the advice is confidential and so a summary should suffice.

Nevertheless, opposition MPs instigated a rare contempt of parliament debate and vote, which could see a minister hauled before the Standards Committee with the possibility of a suspension. In addition, comes news that the UK could still decide to stay in the European Union. Following an inquiry from Scottish MPs, the European Court of Justice's advocate general has said the UK should be able to cancel its withdrawal from the European Union without the consent of other member states. The view is a non-binding opinion from advocate general Manuel Campos Sanchez-Bordona and the European Court of Justice will deliver its opinion later. All that… and the main Brexit vote by MPs is still to come!

Guidance for Buyers

The exchange rate is certainly under pressure and looks likely to remain so for the foreseeable future. A weekly close below 1.2680/90 would suggest that the rate has further to fall; and that a test of 1.2500 was on the cards. Protection should be left below 1.2650 which is the 12 month low. Any move towards 1.3000 should be seen as an opportunity to cover any short term requirements.

Guidance for Sellers

It’s still a great time to be a US Dollar seller. A break below 1.2690 would suggest a quick test of 1.2500. 1.3000 is the initial level to watch on the topside, however, only a sustained break above 1.3300 would cause a change in sentiment. For now, the downtrend is still in place.