Market Analysis: Pound Retreats After No Brexit Deal, US Dollar Gains on Tax Reform

OVERVIEW

• USD gains after the Senate approved the tax bill.
• The Euro is softer after investor sentiment fell more than expected. 
• US stock markets jumped more than 1% on tax progress to fresh record highs.
• Swiss Franc weakens 1% as investors seek higher risk, higher return assets.

HIGHLIGHT

The Pound rallied almost one percentage point versus the US Dollar amid hopes that the UK/EU were on course to reach an 11th hour deal on key stumbling blocks. The “divorce” bill, EU citizens’ rights, and how the border between Ireland and Northern Ireland will function are major topics blocking their progress. However, despite their best efforts, they were not able to reach a deal with Theresa May and Jean-Claude Juncker saying talks will continue this week and they are confident a sufficient progress will be reached before the EU summit in ten days. The Pound fell sharply on the news but has since stabilized and is almost flat on the session now.

US DOLLAR

The US Dollar is broadly firmer at the start of the week, benefitting from the progress of tax cut legislation through the Senate (the House and Senate now must reconcile their competing plans). With the economy already seeing the best levels of growth in recent years, there remain doubts about the necessity of such measures which will add an estimated $1 trillion to the Federal deficit. The potential for faster growth may lead to increased expectations that the Federal Reserve will raise rates three times next year which will support the Dollar. 

BRITISH POUND

The Pound had a rollercoaster ride today on hopes and disappointment over an initial divorce package deal (see highlight).

EURO

Eurozone sentix investor confidence eased more than expected in December but remains close to multi-year highs amid solid growth momentum. The Euro has been broadly well supported by very positive economic data and we see this continuing into 2018, adding to the Euro's recovery. 

CANADIAN DOLLAR

The Loonie is struggling to hold onto its impressive gains against a strengthening US Dollar that came following the stellar Canadian employment data on Friday. Canadian rate hike expectations have risen and are likely to support the Loonie heading into the new year. The Bank of Canada meet on Wednesday this week and are expected to leave rates on hold with no accompanying forecasts.

AUSTRALIAN DOLLAR

The Aussie Dollar has recovered from its lows versus the US Dollar, helped by a solid rise in the price of the country's top export, iron ore, and solid business inventory data. The RBA meets overnight and are expected to keep rates on hold as signaled recently due to tepid inflation, weak wage growth, and rising household debt. 

FEATURED CURRENCY

The Nigerian central bank weakened the Naira slightly, exchanging one US Dollar for 307 Naira for the first time on the official interbank market. Meanwhile, the Nigerian Naira trades at around 360 per Dollar on the black market. As Dollar shortages remain a problem in Africa's biggest economy due to income from sales of crude oil, Nigeria's mainstay remain well below historical averages.  

source: xe.com