Chris Smith

Market Commentary

For the week ending 21 September 2018
Report by Chris Smith
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Chris Smith

This week began with further escalations in US-China trade tensions. At the start of the week, President Trump announced tariffs on a further $200billion worth of Chinese imports to be implemented from next Monday. The measures are set to take effect at a rate of 10%, before ramping up to 25% at the beginning of 2019. Additionally, The White House threatened to pursue “phase three” (tariffs on a further $267billion of imports) if China takes any “retaliatory action against our farmers or other industries”. China duly responded with the announcement of an incremental $60billion of tariffs. It seems that conciliation may be some way off.

The US Dollar (USD) is traditionally viewed as a “safe haven” currency and, as such, one might expect its value to rise against such an uncertain backdrop. This conclusion would seem even more logical with the Federal Reserve set to continue its path of rising rates at their meeting next week; the market implied that the probability of a hike is currently 100%. However, at the time of writing, the USD Index (the USD against a basket of trade partners’ currencies) is trading at its lowest level in more than two months, having fallen by close to 3% from its August peak. Rationalising currency moves is a tricky business, though some commentators have cited optimism around global growth, coupled with the market having grown “used to” the format of the US-China tit-for-tat exchange, as potential reasons.

Another piece of the puzzle is likely to be found closer to home. Sterling has strengthened 1.2% against the USD over the week, supported by better than expected UK retail sales data on Thursday. The Office for National Statistics revealed that sales climbed 0.3% month-on-month between July and August, and were 3.3% higher year-on-year. This represented a significant upside surprise against market expectations for a 0.2% decline and 2.3% rise respectively. Whether such positive data will continue against a backdrop of rising inflation, however, remains to be seen. Indeed, consumer price inflation came in higher than expected on Wednesday, at 2.7% versus consensus expectations of 2.4%, keeping pressure on real earnings.

Developments on the Brexit front will also have a significant impact on the value of Sterling from here onwards. There were some initial signs of progress coming out of this week’s EU leaders’ summit in Salzburg, but the tone soured just before Theresa May’s departure late on Thursday. European Council President Donald Tusk, rejected the linchpin of Mrs May’s plan – an EU-UK free trade area covering goods and agriculture – viewing this as a threat to the single market. With Tusk also demanding progress on the Irish border by an 18 October Brussels summit, the Pound could be set for a volatile few weeks.