Will the US Dollar weaken or strengthen this year? It is about as clear as the skies of London in December 1952 when the ‘Great Smog’ descended.

January has now gone as will the majority of resolutions. Thankfully we won’t need to hear ‘I’m doing dry January’ for another 11 months. Like the enthusiastic overweight lycra clad gym goer, will the US and Donald Trump stick to their commitments or will the whole plan start to slowly unravel?

We had the NFP (Non-Farm payroll) figure released on Friday from the US. As expected, the headline number came in above expectations. 227K jobs were added in January against an expectation of 180K jobs. This is significantly up on the December figure of +157K. What can we take from this? The US is experiencing decent levels of growth and jobs are being added at significant numbers. The one blip on the report was that of wage growth. It slowed to 2.5% from an expected figure of 2.8% YoY. I would expect this to be short-lived and we’ll see an uptick in this number in the coming months with strong job growth filtering through.

The dollar is proving erratic with sharp swings in either direction. You can view the movements last week on Cable (Sterling/Dollar) below –

Cable (Sterling/Dollar)

The Federal Reserve meeting provided us with a slightly hawkish statement with rate rises still on the table. Any potential rate rise will likely come in March with a secondary rate rise likely to be in Q3 this year. Inflation figures look consistent with the Federal Reserve’s medium term outlook. Markets pretty much ignored all of this as currency markets are very much at the whim of political commentary and twitter feeds. Will Trump deliver on infrastructure and tax cuts? Is the initial Trump confidence rally about to come to a crashing halt or are we in for a second wave of USD strength? Will we have a form of currency manipulation this year from the US?

There are a lot of calls for the Dollar to weaken this year. I think we’ll have moves to the downside on the US Dollar for sure throughout this year although I think the US Dollar will ultimately strengthen in 2017. If Trump enacts his pro-growth fiscal policy and protectionism then this should translate to higher inflation, more rate hikes, and theoretically, a stronger US Dollar.  However, answers to these questions are going to change on a daily basis. The unpredictable is about the only predictable. If you have a Dollar exposure against either Sterling or the Euro please get in touch to discuss your individual requirements.

The UK will of course play a huge part in determining the Sterling/US Dollar rate this year. Is Sterling undervalued or overvalued? Are we going to see a move higher or lower for Sterling? We had the Bank of England meeting last week and growth forecasts were rounded up, due in part to modest fiscal expansion and a slow moving improvement in the global economy. Inflation is of course expected to overshoot the 2% target rate in 2017. Sterling/Dollar was volatile last week with the Pound gaining on the news that MP’s backed the Bill to start the exit of the UK from the Eurozone. Sterling then headed south with the Bank of England holding rates at 0.25% and the Government Bond Buying target remaining at £435 Billion. Due to the ruling out of any near term rise in rates Sterling headed south.

The UK economy hasn’t fallen off the proverbial cliff. Figures have been better expected. However, will the expected uptick in inflation start to squeeze households? Are UK households maintaining their current level of spending through borrowing and eroding their savings? Will consumer and business confidence start to falter when ‘Brexit’ negotiations start to gather pace? The answer is no-one knows. Everything is forecasts and projections. However, you can manage the undoubted Foreign Exchange movements by having a plan in place. Whether you implement a Forward Contract, cover off some of your exposure on a SPOT basis, utilise Market Orders or have a mixture of all three to hedge your risk, you need to have a starting price to work from. Please contact me to discuss your upcoming requirements.

On Sterling/Euro we have danced around 1.18 as an upper range in recent trade with the low 1.15s acting as a support. Will we challenge the upside again and target 1.20 which is looking like the Holy Grail at present? You can see the moves last week below –

The Eurozone is starting to show some life. The Unemployment rate fell to 9.6% compared with expectations of 9.7%. Growth for the EU ticked up to 0.5%. Business Confidence is improving. Are Mario Draghi’s stimulus policies working? Are they working quickly enough? How are the upcoming European elections going to effect the single currency this year? The Euro will prove to be turbulent this year although for the time being markets are more focused on the US and the UK. The Euro is out of the limelight for now so the main drivers for Sterling/Euro are likely to be UK based. I don’t expect massive price movements this year for GBP/EUR although I do expect a gradual rise.

If you have a requirement to convert EUR back to GBP I would suggest it might be worthwhile covering off a portion at current levels. Please contact myself or one of the trading team for pricing. If you have a requirement to convert GBP into EUR I would suggest placing some market orders around 1.1650/1.17 and try and take advantage of any upside moves on an intraday basis. Again, please drop me a note and we can implement these for you on a GTC (Good till cancelled) basis.

This week we have limited data out. We have Mario Draghi speaking today and an FOMC member in the US later this evening. There may be some movement on the Aussie and Kiwi Dollar this week with the interest rate and RBA rate statement out of Australia tomorrow. Wednesday we have the RBNZ interest rate decision and Monetary Policy Statement. If you have an exposure to the Aussie or Kiwi Dollar please get in touch prior to these events. Rounding off the week we have the NIESR GDP estimate (3M) (Jan) out of the UK that is likely to move Sterling.

If you have any questions or would like to discuss your upcoming requirements please get in touch.

Have a fantastic week.

Written by Liam Alexander