Sterling jumps to post-Brexit high on easing Syria concerns

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17 April 2018

thomasdodds

The US Dollar slid against most major currencies on the first trading day of the week yesterday as an easing in concerns over Syria led to an improvement in risk appetite.

F
ollowing military action in Syria over the weekend by US, UK and French forces, there was a general consensus among the market that the strikes were an isolated event that would not escalate. With geopolitics again dominating, investors largely overlooked the latest retail sales data out of the US. Retail sales bucked the trend of three straight monthly declines, growing by a better-than-expected 0.6% in March. This is an encouraging sign to Federal Reserve bulls calling for four interest rate hikes in the US this year.

Sterling was one of the main beneficiaries of broad US Dollar weakness on Monday. The UK currency continued on its recent impressive run, taking out the 1.43 level with ease and rallying to its highest level since the Brexit vote versus the Dollar in June 2016.

Traders were eagerly awaited the release of this morning’s UK labour data. While it was a fairly mixed report, we think it more-or-less cements the case for another interest rate hike by the Bank of England at its next monetary policy meeting in May.

Earnings growth including bonus came in unchanged at a relatively lofty 2.8% versus the 3% consensus in February, ensuring the measure is now above inflation for the first time since January 2017. Unemployment also unexpectedly declined, falling to 4.2%, its lowest level in 42 years. Financial markets are already pricing in around an 85% chance of a hike next month, although we think this will trend towards 100% in the coming weeks should data on both earnings and inflation surprise to the upside.

Trump criticises Russia and China of currency devaluation

In a fairly hectic day of currency trading, authorities in Hong Kong intervened in the market for the second time in a week in a bid to hold the recent slide in the Hong Kong Dollar. The Central Bank of Russia stated that it would not intervene in the FX markets, despite the recent sharp decline in the Russian Ruble, while Donald Trump blasted both Russia and China on Twitter, accusing both country’s of playing a ‘currency devaluation game’.

With macroeconomic news few and far between in Europe, the Euro traded largely on external factors, edging towards a three week high versus the broadly weaker Dollar. Activity should pick up in the currency bloc today with this morning’s economic sentiment index from ZEW expected to show that confidence among businesses fell to its lowest level since 2016 in April.