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Pound Falls from Opening Levels against Euro, US Dollar ahead of President Trump Inauguration

Investors are favouring the Pound over the Euro and US Dollar today, after news the Supreme Court will rule on Article 50 on Tuesday.

Latest News;

  • News of incoming Supreme Court judgement boosts Pound
  • Euro unsettled ahead of ECB monetary policy meeting
  • US Dollar weakens on potential for Trump-Fed clash
  • Pound forecast to remain focussed on Supreme Court news

The Euro is jittery ahead of the next round of monetary policy decisions from the European Central Bank (ECB), while investors are re-evaluating how the Fed may respond to Donald Trump’s intended spending plans.

Afternoon Update, 20th Jan; Thin trading ahead of the Presidential inauguration is weakening the Pound now, with GBP EUR and GBP USD both on the decline.

Morning Update, 20th Jan; The markets are unsettled today ahead of the inauguration of President Trump, which is keeping the Euro and US Dollar weak. The Pound has been unable to take advantage, however; investors are concerned by comments made by legendary investor George Soros that Theresa May won’t last long as Prime Minister, due to her divided cabinet and the small majority she holds in Parliament.

Closing Update, 19th Jan; Goldman Sachs has blamed Brexit for its decision to pause plans to relocate key aspects of its business to the UK. Goldman Sachs claims the uncertainty surrounding Brexit has slowed the decision. There are fears the bank could even relocate 3,000 of its London workforce out of the country. The Pound remains strong, however.

Afternoon Update, 19th Jan; Mario Draghi has continued his usual trick of weakening the Euro with dovish talk. Any investors hoping the recent strong inflation data would have prompted a more hawkish outlook from the ECB head will have been disappointed.

Midday Update, 19th Jan; Theresa May has told the global elite in Davos today that Britain will be a global leader of free trade following Brexit. While this may have done something to settle investor fears over isolationism, it has had a negligible impact, if any, upon the Pound so far.

Investors Return to Pound on Hopes of Government Defeat in Supreme Court Ruling

Investors may have sold the Pound yesterday in a bought of profit-taking, but Sterling is rising today on correctional trading.

Supporting the Pound higher is the news published late during yesterday’s session that the much-awaited Supreme Court judgement on Article 50 will be announced on Tuesday next week. The government battled in a four-day court case at the beginning of December to have a High Court ruling overturned. The judges had ruled in favour of the claimant, Gina Miller, who argued that the triggering of Article 50 legally required an act of Parliament.

While the government disputed this claim, arguing it could use ‘Royal Prerogative’ to take the action without putting a bill before MPs, sources claim that the Cabinet expects to be defeated. In fact, it is widely believed the Supreme Court will uphold the initial ruling.

This excites investors because Parliament will be able to amend the bill to trigger Article 50 before it gets passed. MPs could, theoretically, force Theresa May to negotiate for continued single market access, despite the Prime Minister repeatedly stating that she is aiming for what others have described as a ‘Hard Brexit’.

According to John Halford of Bindmans law firm;

Parliamentarians need to clear their diaries and make themselves ready. If the appeal is dismissed, as we hope, they will be able to insist on proper proposals, debate, accountability and meaningful control of every step the government takes from now in relation to its Brexit plans. And British people should expect no less of their representatives.

The Pound is therefore making gradual gains against the Euro, while trending bullishly versus the US Dollar.

Euro Mixed Ahead of European Central Bank Rate Decision

The European Central Bank (ECB) is due to announce the policy decisions from its current meeting later today. Investors are widely expecting no change and the long-term outlook would also seem to be fairly stagnant.

Recent strong inflation results for the currency bloc had sparked hopes amongst investors that the ECB Governing Council may rethink their stance on quantitative easing. Policymakers recently voted to extend the asset purchase programme to December this year, although it reduced the monthly quota of bonds to buy from €80 billion to €60 billion as of April.

With inflation accelerating markedly, many had hoped that policymakers may be tempted to taper QE. The release of the minutes of December’s meeting further excited, as they showed the decision to continue QE past the already-delayed end date of March was far from unanimous.

However, analysts do not expect there will be any suggestion of a change in attitude towards quantitative easing, or the general state of monetary policy. Goldman Sachs explained that;

In line with the broad market consensus, we expect little action at the meeting, based on the lack of market news since December. Specifically, we expect key policy rates to be left unchanged, and no changes to the Asset Purchase Programme (APP). We expect the introductory statement to continue to describe risks to the growth outlook as skewed to the downside, and that Mr. Draghi will resist any suggestion that recent inflation data warrant the withdrawal of monetary accommodation.

Fears of Clash between Trump and Fed Soften US Dollar ahead of Inauguration

Pound exchange rates

Federal Reserve Chair Janet Yellen has given a pretty strong indication in her latest public speech that she feels the US economy is recovering well and that the time of accommodative policy from the Federal Reserve is coming to an end.

Yellen commented that;

Now, it’s fair to say, the economy is near maximum employment, and inflation is moving toward our goal…. although inflation has been running below our 2 percent objective for quite some time, we have seen it start inching back toward 2 percent last year.

While this is technically hawkish for the monetary policy outlook, with Yellen citing a ‘few’ rate hikes this year, it has caused some consternation amongst investors.

The issue is that part of Trump’s awaited stimulus spending plans include funnelling much more money into infrastructure projects, such as building roads and bridges, to boost employment. However, the Federal Reserve – along with many economists – claim the labour market is already at capacity. Unemployment rates much lower than the current 4.7% are deemed unsustainable.

Neil Irwin of The New York Times, explains the issue thusly;

Here’s one way things could go: The Fed steadily raises rates, to the degree that employment and inflation data cooperate with their forecasts, with faster rate increases the higher growth rises. It’s possible that what people in Mr. Trump’s orbit view as a desirable boom will look to Ms. Yellen and her colleagues as overheating, and prompt equal and opposite interest rate increases.

The US Dollar has weakened as traders come to terms with the fact that Trump’s stimulus measures may not be the shot in the arm the US economy necessarily needs or can handle.

Pound, Euro and US Dollar Forecasts; Could ECB Surprise with Hawkish Response to Inflation?

There is no UK data on the calendar today, meaning the Pound is likely to continue to respond to hopes of a favourable Supreme Court ruling.

The Euro, meanwhile, could remain uncertain until ECB President Mario Draghi starts his press conference. While no changes are expected, Draghi could surprise markets with a more hawkish assessment of Eurozone inflation than expected. However, if asked about tapering or ending quantitative easing, he is likely to give his stock answer; ‘we did not discuss it’.

US jobs claims data is set for release this afternoon. An improvement on the number of people claiming out of work benefits could further underline the difference in stance between Trump and the Fed, while a weakening may actually calm investor fears by showing there is indeed room for improvement. However, with the Presidential Inauguration just around the corner, it is likely today’s medium-impact data won’t have much of an effect on the US Dollar.

Interbank Pound, Euro, US Dollar Exchange Rates

At the time of writing, the Pound Euro exchange rate was trending around 1.15, while the Euro Pound 0.86.

The Pound US Dollar exchange rate was trading in the region of 1.23, while the US Dollar Pound exchange rate was trending around 0.81.