Pound Exhibits Performance in Years

Daily Analysis - 18/01/2017

Speech From UK Prime Minister Indicates Brexit Will Require a Parliamentary Vote

UK Sterling was the best performer during Tuesday’s session, showing the biggest rally in years as the Prime Minister spoke in greater depth and detail regarding Brexit and how her government was working to leave the European Union entirely. The big surprise was the requirement for parliamentary approval for any final deal, sparking a run higher in the Pound.

Sterling Soars on May Comments

Although the text of the speech was leaked early, UK Prime Minister Theresa May took markets by surprise on Tuesday when she confirmed the UK Supreme Court’s ruling on the matter of Brexit approval. While she is able to proceed with the triggering of Article 50 to begin exit negotiations, any final deal must be voted on by both houses of Parliament.

Although the UK Conservatives hold a majority in the House of Commons, the House of Lords might present some resistance despite the fact that no vote on the matter is anticipated before 2019. The possibility that the UK will not be exiting from the European Union was enough to spark the best rally in the Pound since 2008, with GBPUSD climbing nearly 400 pips from session lows.

The rally in the Pound sent the FTSE 100 experiencing the worst loss since the referendum over the summer.

China Home Price Gains Taper Modestly

In a sign that measures designed to cool the housing market are beginning to take effect, the climb in Chinese housing price slowed from 12.60% to 12.40% on an annualized basis through the end of December. The measure, which tracks housing prices in 70 cities, has now risen for 15 straight months, with the latest tapering likely a function of the increased property curbs implemented by Chinese policymakers.

The biggest gainers however were Beijing and Shanghai which experienced 25.90% and 26.50% increases respectively. Meanwhile, Chinese President Xi Jinping made an appearance in Davos, Switzerland during the World Economic Forum to tout China’s global presence and determination to be a leader in free trade amid the populist rhetoric that is crisscrossing the globe.

After a steep appreciation during the President’s comments, the Yuan is back on the retreat during Wednesday trade.

German CPI Climb Confirmed

In another sign that the European Central Bank may gradually be able to taper its asset purchase program further now that deflationary risks have been averted, German consumer prices rose to the highest point since 2013. According to the Federal Statistics Office, German headline consumer inflation rose to 1.70% during December, marking a sharp rise from the 0.80% reported back in November.

Cost of goods, namely food and energy, were the primary drivers of the gains, contributing 1.80% to the upside in the figure while services costs rose by 1.50% through the end of December. The rebound in oil prices in particular has helped catalyze the upside in the figure, potentially suggesting that the ECB may remove accommodation earlier than planned after opting to extend asset purchases through December.

After a strong performance on Tuesday, EURUSD is pulling back modestly from the prior session’s gains.

Fed Cautions on Fiscal Stimulus

In another sign that policymakers from the US Federal Reserve are concerned about proposed fiscal stimulus plans, comments from Fed Governor Lael Brainard suggested that the Central Bank might be forced to raise rates quicker than planned.

One of the main drivers of this sentiment is the idea that larger deficits as a function of fiscal stimulus could rapidly add to the upside in inflation, requiring rate hikes to temper the gains.

Although she indicated that the US economy was nearly operating at full strength as unemployment ebbs and inflation climbs, the unknowns of forthcoming policy could be enough to shift the thinking of Central Bank officials. It is likely that Fed Chair Janet Yellen will address these subjects later in the session when she is due to speak, potentially stoking volatility in key equity benchmarks.