5 minute read
Market Strategist Neil Parker asks some key questions around the challenges facing the world’s major currencies. Have you considered these?
Sterling ended 2019 heading higher, but can it maintain momentum?
The pound rallied into the end of the year and started 2020 above $1.32 and €1.18 against the US dollar and euro, respectively. But can it hold onto those gains? Especially considering that the latest rally seems to have little to do with fundamentals.
Thursday 2 January saw the final release of the December manufacturing Purchasing Managers Index (PMI) survey, and it showed a minor improvement after the disappointment of the survey estimate data released just before Christmas. This is the first data test for the pound, and though it didn’t pass with flying colours, it, and other surveys, are pointing to a post-election bounce in sentiment. Now the question is, will that turn into stronger growth?
Economic and political challenges for the currency
The year ahead will present a number of challenges for sterling, from both an economic and political standpoint. It raises a number of key questions for us:
- The new UK government will press ahead with Brexit, but how will trade negotiations with the European Union develop?
- The Bank of England will be looking for some economic improvement, but will they cut rates more if none is forthcoming?
- Private equity firms have more capital yet to be deployed than ever before, according to Bloomberg, so could that prompt an investment spree in the UK?
Ultimately in my view, the pound still has to convince the markets that it can hold onto recent gains, let alone rally further from here.
US-China trade deal signed, so what’s next?
The Phase 1 agreement between the US and China, signed on the 15 January at the White House, closed the chapter on this. But it was more ‘what was missing’ from this deal that grabbed the headlines.
Nothing on technology transfer, intellectual property rights, only a partial roll back of US tariffs on Chinese goods, this was a holding agreement that still left the position worse than when the trade dispute started. What will be the next focus, prior to the US Presidential elections in November?
The US economy may spark the greater interest
For the US dollar, the year ahead has had a Presidential impeachment hearing and then the Presidential elections due on the political front. But it may be the economy that provides greater interest for markets.
All this has led us to question what’s next:
- Will the US-China trade accord lead to a rebound in activity?
- Or will the economy continue to struggle?
- If so, what will the Federal Reserve do?
- And how will that affect sentiment towards the world’s trade currency?
- Is the coronavirus a global economic threat?
Can Euroland shake off the malaise in 2020?
2019 is likely to be a year that Euroland wants to forget. A downturn in activity in its largest economy, a collapse in the Italian coalition government, further unrest in France and inflation rooted to the floor – were some of the lowlights. Against this backdrop, we’re asking:
- Will a change in the leadership at the European Central Bank (ECB) prompt resurgence in activity?
- What solutions might be left from a monetary perspective, if any?
- Will the ECB be successful in their efforts to get governments to spend more fiscally?
The final manufacturing PMI figures for December confirmed a modest bounce, but the provisional January figure was disappointing, so are we heading for an improvement in growth or more disappointment?
Could 2020 be a repeat of 2019 in terms early optimism being replaced by pessimism the longer into the year we get?
For the markets, there is less focus on monetary policy in 2020 than there was in 2019. Instead, the focus is on fiscal policy, who has the room to spend more, and where do they intend to spend it? Brexit issues have taken a back seat for now, but could re-emerge later in the year, and the US Presidential election race is about to hot up. Currency market volatility is very low on an historic basis, but with the pressures on economies from domestic and international sources, can that remain?