Sterling holds steady as Brexit overshadows the Budget – 23rd November 2017

Sterling holds steady as Brexit overshadows the Budget – 23rd November 2017

If there were any proof needed that Brexit is the sole focus for investors at the moment, the reaction by the markets to yesterday’s budget was that proof. The outlook for growth until 2021 was downgraded by the Chancellor Philip Hammond, yet Sterling hardly moved versus the Euro although it did make ground against a US Dollar weakened by concerns over monetary policy in the U.S. The outlook for growth until 2021 was lowered from 2% in March to 1.5% as the effect of Brexit on trade and business investment going forward was fully factored in. Hammond provided a little help to the housing market, but this was more in the shape of incentives and tax changes rather than actual hard cash to invest in house building.

Ultimately, it is Brexit that is overshadowing every aspect of the economy as traders await official confirmation that the UK is going to offer forty billion Euros as its contribution to the EU Budget to kickstart talks on stage two of the process.

In the US, the US Dollar index which measures the performance of the US Dollar against six of its major trading partners fell yesterday on news that members of the FOMC are becoming concerned where inflation is going to come from to justify future interest rate hikes in the US. The minutes of the most recent Fed meeting were released yesterday and showed that even a December hike is far from certain which saw the US Dollar index close near a one-month low as the prospect of the US Dollar’s interest rate advantage faded a little.

The US Dollar was also affected by a fall in durable goods orders in October. This is a notoriously volatile number since it deals with “big-ticket” items but it also provides an insight into future economic activity as it refers to long term capital orders. Durable goods orders fell by 1.2% in October following a 2% rise in September which was revised lower from 2.2%

The shock is starting to subside after the news that German Chancellor Angela Merkel is struggling to form a coalition Government to lead Germany for the next four years, with a slightly less grim picture than had first been imagined. Mrs Merkel is apparently at her desk ruling Germany as she has for the past twelve years and the operation of Government is continuing under her caretaker rule and this can go on indefinitely. Not ideal, but it is working for now.

The more right-wing newspapers across Europe, are painting a picture of Europe in disarray with Spain’s crisis in Catalonia, Italian Banks about to collapse and now German electoral chaos. The reality is, naturally, a little different and the EU continues to be driven as much by the will of the people for it to succeed as it is by the politicians.

The common currency is being driven by outside factors for now, in particular the weakness of the US Dollar. It reached EUR/ USD 1.1828 yesterday and has continued to move a little higher overnight reaching a high of 1.1839. The major resistance is at 1.1880 which looks unlikely to be seriously tested for now.

With the US enjoying a Thanksgiving Holiday today, the key data is from the UK in the form of GDP which is expected to remain at 0.4%.


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