- Uncertainty about Brexit details will continue to weigh on sterling
- Encouraging economic news for the Eurozone has lifted the euro lately
- The Turkish lira’s downward spiral has yet to run its course
Monday’s a slow day for scheduled economic news, in part because US markets are closed for Martin Luther King Jr Day.
During the data lull, let’s review the three currency pairs that will remain at the top of the forex headlines in the week ahead: GBP/USD, EUR/USD, and USD/TRY.
GBP/USD: The case for expecting a “hard” Brexit has strengthened recently, which suggests that sterling will remain under pressure for the near term.
Although the full details on how Britain will leave the European Union (EU) won’t be known for months, the market’s inclined to assume that the UK won’t receive any sweetheart deals on its historic break with the euro area.
The bearish tone has eased in the new year, although sterling continues to trade near its lowest level in decades against the US dollar.
The Brexit uncertainty is to blame, although the UK economy has been surprisingly resilient since last June’s historic vote, even if the sharply devalued pound suggests otherwise.
Nonetheless, expecting a sustained rise in GBP/USD remains a high-risk bet, at least until UK Prime Minister Theresa May is ready to clarify what she means when she insists that “Brexit means Brexit.”
A step in that direction may arrive as early as tomorrow, when May is scheduled to deliver a speech that could provide more details on the departure. A key grey area at the moment is whether the UK will seek to remain within the EU customs union.
Meantime, the clock is ticking. The formal separation papers (Article 50) are due in March. But even here there’s no shortage of mystery about the details of what will be revealed and when.
For instance, the Supreme Court will soon decide if the government must ask for a formal yea or nay from the House of Commons before setting Article 50 in motion.
Last week’s relative stability for sterling has inspired talk that the currency may have reached bottom, although some, if not most of the flatlining is less about rebound prospects for the pound against a pullback in the strengthening dollar.
In any case, as long as the Brexit playbook remains a guessing game, GBP/USD rallies will likely be fleeting affairs.
EUR/USD: Is the recent strength in the single currency against the US dollar sustainable?
It’s tempting to answer “No” in part because expectations are widespread that Donald Trump’s economic policies (lighter regulation, lower taxes, and fiscal stimulus) will deliver stronger US economic growth in due course.
Deutsche Bank, for instance, recently predicted that US GDP growth will double once the president-elect’s policies take effect.
All the usual caveats apply, of course, but for the now the crowd is embracing the prospects that the incoming administration will juice the economy.
The outlook for the Eurozone is rebounding, too, with one difference: Firmer expectations are based on existing data against political chatter.
For instance, Friday’s weekly update from Now-casting.com estimates quarterly GDP growth in the currency area at nearly 0.6% for Q4 – roughly double Q3’s pace. The projection for this year’s Q1 rise is even stronger – nearly 0.8%.
Recent releases for Europe’s hard data have been cooperating too. Last week’s numbers on industrial production, for example, packed a punch, revealing a sharp acceleration in output for November.
By some accounts, the uptick in growth warrants a bit of tightening from the European Central Bank, which is also helping the euro strengthen against the dollar.
The forex market appears to be anticipating no less. The latest rise marks the euro's longest run of weekly gains in two years.
Can the rally hold up? The odds look favorable if Europe’s economic data remains upbeat.
As for expectations that Trump will engineer an American economic revival, well, maybe, maybe not.
Even if optimism is warranted for his agenda, there’s a long road ahead for translating political plans into economic reality.
Meantime, the Eurozone recovery appears to be picking up speed in the here and now.
USD/TRY: It’s been a rough year so far for the Turkish lira, and it’s not clear that the near-term future is going to bring a reprieve.
After tumbling 17% last year, the currency has shed more than 7% so far in 2017 against the US dollar, based on daily numbers.
The technical profile implies that the bearish trend hasn't run its course yet: USD/TRY has surged above its 50-, 100-, and 200-day moving averages in recent months, which suggests that the respite late last week for the lira is only temporary (note: higher values of USD/TRY equate with a weaker lira).
The key factor, of course, is Turkey’s tortured political climate, which has deteriorated since last year’s failed coup attempt that convinced the government to curb democratic freedoms and unleash a crackdown on an ever-widening circle of perceived enemies of the state.
But in the rush to purge, the formerly fast-growing economy has become a victim.
The latest twist in the ongoing crackdown, real or imagined, is President Tayyip Erdogan’s call last week to “root out” so-called manipulators of the lira in foreign exchange markets.
A key factor that would stabilise the lira – higher interest rates – is considered unlikely at the moment, due to political pressure from the government to keep the central bank's monetary policy sidelined.
"The market continues to look for one principal message – that the central bank is independent. That really is the one message the market needs now," an analyst at Legal and General Investment Management said on Friday.
The turmoil has elevated uncertainty, taking a toll on the economic expectations and pushing the lira ever lower.
The preferred course of action in the country’s business sector is to adopt a wait-and-see attitude and build a safety net of liquid reserves.
Not surprisingly, the macro trend has turned negative, with GDP slumping 1.8% in last year’s third quarter and more of the same expected in upcoming data.
Nonetheless, the lira rebounded a bit by the end of the week against earlier declines, but almost no one thinks this marks the beginning of sustainable rebound.
Disclosure: Originally published at Saxo Bank TradingFloor.com