Trumpcare a non-starter
The inability of President Trump and the Speaker of the Senate, Paul Ryan to push through the bill for the boll-back of Obamacare has had two significant effects.
First, this is a major setback for the President as he attempts to pass a series of measures designed to provide stimulus to the economy. Second, traders fearing that the trajectory of interest rate hikes will slow down have sold the dollar. The currency has fallen to its lowest level against the JPY since the height of the euphoria which surrounded the election.
The pound and dollar have broken through, and more importantly, held above significant resistance levels, trading at 1.2535 and 1.0850.
This is obviously a big week for the U.K. with the “Brexit exit button being pushed” opening exchanges in the negotiations between the U.K. Brexit minister and the E.U. Council President will be pored over for signs of weakness, compromise or common ground.
According French think-tank Institut Montaigne, an independent institute with links to French presidential candidates Emmanuel Macron and Francois Fillon, a "multi-speed" Europe is needed in which the euro zone presses ahead with its own budget and even a prime minister.
This report may have not been what Macron and Fillon need since this is one of the major fears for France being touted by their major rival Marine Le Pen.
Following last week’s almost stellar data releases, the pound continues to be considered a “buy on dips” with the economy trumping politics for now at least. The (majority of) MPC are taking a much wider view on inflation than the government. It is impossible to stick rigidly to a 2% target since there are so many factors affecting consumer prices.
There is a marked contrast between the German and British economies. In Germany, there is a real possibility that the economy is overheating due to an ultra-easy monetary policy being adopted by the ECB. This has led to calls from both the German President and her finance minister for three things: An end to monetary stimulus, a rate hike and a strengthening of the currency. The first two would lead to the third!
In the U.K., the MPC is clearly blaming the post Brexit vote fall in sterling as the main (if not only) driver of inflation. The consumer is doing its best to add a little inflation adding in a 2.8% rise in retail sales in February. The headwinds caused by Brexit are creating concern over economic activity during the negotiation period, so despite stronger data, a rate hike isn’t on the card in the U.K. either.
Risk aversion has been added to market sentiment over the past week or so with the market giving its opinion on the political events in the U.S.
The JPY, everyone’s market risk barometer, is trading at its highest level since November 22nd against a weaker dollar. There is further room for the yen to appreciate against the AUD and NZD since they are the favourite risk off trades.
This week’s significant data releases, events and speeches are:
Today’s German IFO index of economic activity
- U.S. house prices and consumer confidence tomorrow
- U.K. Consumer Credit on Wednesday
- Triggering of Article 50 also on Wednesday
- Eurozone industrial and consumer confidence and sentiment reports on Thursday
- Chinese Purchasing Managers indexes and U.K. Q4 GDP on Friday