FX market outlook

The British pound steadied ahead of a speech by Prime Minister Theresa May later today on the UK’s priorities regarding Brexit.  Markets were also worried by the increasingly protectionist tone coming out of the Trump administration and the uncertainty regarding his policies when he takes office this Friday.  These factors caused some profit-taking in risk assets and a rise in safe havens such as gold and the Japanese yen.

According to reports from her office, May will not seek a “half-in, half-out” deal with the EU and she will likely aim to implement full immigration controls while leaving the EU’s Single Market.  This would lead to a so-called ‘hard’ Brexit, which means that Britain’s economic relationship with the EU bloc will be substantially smaller; including an exit from the tariff-free zone of traded goods.  Still, market participants were reluctant to drive the pound even lower following recent losses, as the previous day’s moves had probably factored in most of the impact from May’s speech.  The speech itself will nevertheless be a key risk event for the pound.

The pound recovered to 1.2125 versus the US dollar, while it drove the euro back below the 88 pence level to 0.8775.  There were also some news out of the Bank of England, as Mark Carney gave a speech on Monday in which he refused to be drawn into speculation about the pound.  Carney also pointed that the UK expansion was consumption-led and that the Monetary Policy Committee was willing to tolerate above-target inflation with limits.

Elsewhere, the yen rallied versus the greenback mainly on concerns about Trump’s policies once he assumes office on January 20.  Dollar / yen dropped by almost 1 yen to 113.17, continuing the sell-off in the pair.  Gold also rose to a near 2-month high around $1214 an ounce, which reflected uncertainty and a rush into safe assets.

The dollar also lost ground against the euro, as euro / dollar climbed to 1.0665, once again making an approach towards the 1.07.  Such an approach failed at 1.0683 the previous Thursday.

Looking ahead, apart from May’s speech which is expected around the middle of the European session, UK inflation will also be looked at.  The German ZEW economic sentiment index will come out too, while the US comes back to work from its long weekend with a speech by New York Fed President William Dudley and the Empire State Manufacturing index.  The bi-weekly dairy prices auction could also move the New Zealand dollar during the day.