The GBP is trading on the defensive as the new year kicks into gear, and it’s the fear of a hard Brexit that seems to be the catalyst. The data released in the UK so far has been mixed, but soft trade data which showed that imports far exceed exports put further downward pressure on the GBP/USD currency pair.
Sterling dropped below 1.2100 in the forex market for the first time since October 2016 in the wake of the UK trade data, which showed a GBP 2.6 billion rise in the deficit in November, which printed a reading of GBP 4.2 billion. Generally, when the value of a currency declines exports start to increase leading to growth as consumers outside of the UK are able to purchase more UK goods and services.
The trade data is disappointing and seemed to trump any positive news which included better than expected production data and strong producer sentiment surveys such as manufacturing and services. The vote to leave the EU is market with issues that will only help sterling if they are resolved quickly. In fact, most believe that a hard Brexit could generated additional strife which could put back many new deals by more than 2-years.
Also, effecting the forex market was housing data released in the U.S>. The MBA mortgage market index jumped 5.8% which came alongside a 6.1% bounce in the purchase index and 4.4% rise in the refinancing index for the week ended January 6. At the same time the average 30-year mortgage rate declined 7 basis points to the 4.32% area after a bumpy ride to start the year following a Fed rate hike in December and a mixed jobs report at the end of that period. This shows that consumer are very sensitive to the price of their mortgages which have been rising in rates since the November U.S. presidential election.
Riskier assets continue to outperform in both the U.S. and UK. The FTSE 100 hit a record high in the second week of January as the weaker cable is helping to buoy the perception that multi-nationals will generated more revenue. In the U.S., the Nasdaq 100 is leading the charge higher.
While the Nasdaq lagged in the latter part of 2016, following the Trump election, it is now playing catchup making 4-consecutive fresh record highs. Technology stocks appear to be the catalyst behind the rise in U.S. equities. Energy shares on the other hand have been hit relatively hard. Oil and natural gas prices have been falling after re-testing resistance near the 55 per barrel level. OPEC has started to reduce production but traders will need to see a contraction in U.S. imports before oil prices are able to stabilize and eventually move higher toward the $60 handle.
Natural gas has tumbled more than 20% since hitting a 52-week high in late December. Warmer than normal weather is forecast to cover most of the United Stage during January which is reducing heating demand which generates headwinds for natural gas prices.
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