Post date: 16/03/2018 18:00
We saw a renewed spark in the market this week as Philip Hammond released the spring budget. The independent Office for Budget Responsibility has lifted its predictions slightly for UK economic growth for 2018. Due to this the pound rose near to 1.4 against the dollar and near to 1.13 against the euro – both at 3 week highs.
After this good start, The Bank of England (BoE) is expected to begin increasing the interest rate, with many anticipating a rate hike by this May. Subsequently, The Sterling is suffering due to the uncertainty surrounding Brexit. One of the key points of negotiations are on whether the UK financial sector will have access to the single market following Brexit. This is proving to be a difficult and drawn out negotiation. Theresa May’s proposal was for the UK to have continued access to the single market while abiding by the highest standards of international laws. This was declined by Brussels.
The French wish to attract UK financial services to Paris in order to benefit from tax revenue. Financial services are the biggest form of tax revenue in the UK. French politician, Bruno Le Maire has stated the UK will have to utilise a legal mechanism know as equivalence. Equivalence allows countries outside the EU to have limited access to the single market. This is dictated by Brussels and can be revoked at any time. Hardly a stable situation for UK based financial services. Consequently, until there is more clarity on this situation the GBP/EUR may stay below a big resistance point.
The US economy has been consistent recently with their data. However, the USD is in for some turbulence following President Trump's continued stance on ‘trade wars’. It looks almost certain Trump will be putting tariffs on steel and aluminium imports. Additionally, Trump sacked John McEntee (his personal assistant) creating further uncertainty and causing the USD to be sold off.
The Federal Reserve interest rate forecast is crucial at the moment for the USD. Federal Reserve representatives have indicated there could be as many as three rate hikes this year. It would not come as a surprise to see as many as two rate hikes from the FED if you consider recent history. This would be despite the recent change in Fed chair from Janet Yellen to Jerome Powell. A rapid rise in interest rates has the potential to cause serious problems for the US economy. The most drastic effect of a steep rise in rates would be the increase in pressure on US tax payers to repay current debt. As a result, this could cause major ripple effects for markets worldwide.