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US has “hottest economy in the world"

Published: Friday 08 February 2019

  • ​​Nothing less than a miracle!
  • Trade deal must end “theft of American jobs”
  • Brexit Heaven or Hell?
After a brief flirtation over 1.30 in typical Interbank rates in January 2019, GBPUSD dropped to around 1.295 in early February. The monthly low of 1.270 came on 15th January along with a series of bearish outlooks from analysts due to fears over the battle between Congress and President Trump and worries over excess economic tightening, while the monthly high of 1.321 came on 27th January over hopes that Theresa May’s Brexit deal would be approved by MPs. The performance of the pairing over the month will be dependent on developments in the “hottest economy in the world”, trade talk outcomes and whether the Brexit saga is heaven or hell for the UK.

Nothing less than a miracle!

Ahead of the State of the Union address, much has been on immigration, the southern wall and the political battles with the Democrats. But at the heart of the speech from President Trump was the strong US economy. In fact, he described the economic success as nothing less than a miracle, an unprecedented boom and the hottest economy anywhere in the world.

He says, "An economic miracle is taking place in the United States and the only thing that can stop it are foolish wars, politics or ridiculous partisan investigations. Donald Trump detailed the "unprecedented economic boom" which consisted of rising wages, 5.3 million new jobs, 600,000 new manufacturing jobs and low unemployment. To continue the success, he argues, the nation has to amend its trade policies, including those with China that are currently being renegotiated. "To build on our incredible economic success, one priority is paramount: reversing decades of calamitous trade policies.” The Dollar wavered between 1.293 and 1.297 against the Pound in the day after the speech.

Trade deal must end “theft of American jobs”

The US-China trade deal must end long-standing unfairness including the “theft of US jobs” and force “structural change”, Donald Trump stated in the State of the Union address. “We are now making it clear to China that after years of targeting our industries and stealing our intellectual property, the theft of American jobs and wealth has come to an end. We are now working on a new trade deal with China. But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit and protect American jobs.” That’s the message President Trump will convey to China President Xi Jinping when they meet later in February 2019. The two superpowers are looking to reach agreement before the 1st March deadline. It seems there has been no breakthrough yet on solving China’s practice of forcing foreign companies to hand over technology when setting up. If no deal is reached, the United States says it will raise tariffs on $200 billion of Chinese goods from 10% to 25%.

US Treasury Secretary Steven Mnuchin says both are fully committed, but there is still “a lot of work left”. "If we can't get to the deadline, it's not because we haven't worked around the clock. I think there's a big commitment on both sides to try to meet this deadline." He also says that he is confident that the USMCA trade agreement – the updated NAFTA agreement between the US, Mexico and Canada – will be approved by Congress. There have been suggestions that the agreement will be held up until steel tariffs are removed. Democrats have also criticised the deal for lacking the tools to enforce labour and environmental protection measures.
Background of 100 dollar bills - Halo Financial
Patience on rate rises

The Federal Reserve has signalled that it will be patient over future interest rate rises. At the end of January 2019, the Federal Reserve voted unanimously to hold its Federal Funds Rate at 2.25-2.5%. It says, "In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”This was reiterated by Reserve Chairman, Jerome Powell at a news conference, saying, “The situation calls for patience. We have the luxury to be patient.” Although the Fed lowered its assessment of economic growth from "strong" to "solid" it says inflation gauges "have moved lower in recent months." As a result of the more dovish comments, the Dollar moved up against the Pound from around 1.305 to 1.311.

Brexit hell or heaven?

In advance of Brexit talks, European Union Council President, Donald Tusk, has delivered a broadside to UK Prime Minister, Theresa May, and leavers who have no ideas on how to proceed. He says, there is a “special place in hell” for “those who promoted Brexit without even a sketch of a plan of how to carry it out safely". Brexit-backing MPs reacted angrily, accusing Mr Tusk of arrogance and questioned if the “disgraceful” comments were helpful, particularly coming a day before Mrs May is due to meet both Mr Tusk and European Commission President, Jean-Claude Juncker. It remains to be seen if hell has no fury like a woman scored! Both European heads have already warned that the withdrawal agreement is not up for negotiation.

However, Mrs May has been working on proposals to either remove the need for the backstop or provide a firm time limit that she hopes will produce a heavenly result for the UK. Leader of Ireland’s Democratic Unionist Party, Arlene Foster, has warned that European Union “intransigence” in refusing to talk could cause a no-deal Brexit. Foreign Secretary, Jeremy Hunt, has suggested that if no progress is possible at the moment, the Brexit deadline could be extended to give the UK more time to reach agreement with the European Union. He told the Today news programme. “I think it is true that if we ended up approving a deal in the days before the 29th March, then we might need some extra time to pass critical legislation. But if we are able to make progress sooner then, that might not be necessary.”

The comments come after the vote on a series of Brexit amendments by MPs, who made it clear that they want a deal agreed before leaving the European Union and “alternative arrangements” to the Irish backstop. However, they pulled back from making a binding agreement to delay Brexit, as the vote in late January was only advisory. Following the votes on a series of Brexit amendments, European Union leaders have stood firm, saying that no renegotiation over the backstop will be possible. UK businesses are concerned that the ongoing uncertainty and delays, with reports that almost one in three businesses have moved operations from the UK or are thinking of doing so. So says an Institute of Directors (IoD) survey. It reports that 29% of firms among 1,200 members believed Brexit posed a significant risk to their operations in the UK and had either moved part of their businesses abroad already or are planning to do so.

The IoD’s interim director general, Edwin Morgan, says, “We can no more ignore the real consequences of delay and confusion than business leaders can ignore the hard choices that they face in protecting their companies. Change is a necessary and often positive part of doing business, but the unavoidable disruption and increased trade barriers that no deal would bring are entirely unproductive.”

Carolyn Fairbairn, Director General of the Confederation of British Industry called the House of Commons votes another deeply frustrating day for British business. “The never-ending parliamentary process limps on while the economic impact of no deal planning accelerates. The Brady amendment feels like a throw-of-the-dice. It won’t be worth the paper it is written on if it cannot be negotiated with the EU. Any renegotiation must happen quickly – succeed or fail fast.”

Adam Marshall, Director General of the British Chambers of Commerce, agreed, saying, “Government and parliament are still going round in circles when businesses and the public urgently need answers.” These may come over the next month.

According to UK Prime Minister, Theresa May, if no new deal is reached by Thursday, 14th February, MPs will get a Valentine’s present in the form of a further Meaningful Vote. If not, then on there will be another vote on Thursday 14 March. However, even though MPs say they want a deal, if none can be reached the default position is that Britain will leave the European Union on 29th March without agreement.

Guidance for USD Buyers
Markets are still trading sideways more or less in the range that has been in place since August 2018. Trend line resistance comes in around 1.3200 and that would be the obvious initial target. Support now sits at 1.2798; a break below here would suggest a quick move towards 1.2480.
Guidance for USD Sellers
Any rate below 1.3000 is still a great opportunity for US Dollar sellers. For now, 1.2900 is the initial support, with stronger support seen at 1.2800. Protection should be left above 1.3250.

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