Trump Versus Mnuchin

Currency war talks make headline amid Mnuchin comments

EUR/USD took a roller coaster ride over the last 24 hours as US Treasury Secretary Mnuchin and President Trump made opposite comments about the greenback, while the ECB was holding its first press conference of the year. On Wednesday, The former said that a weak dollar was good for US trade, while on Thursday the latter said "The dollar is going to get stronger and stronger and ultimately I want to see a strong dollar". During the press conference, Mario Draghi made a remark about Mnuchin’s comments, saying that EUR/USD has increased not only because of the improvement of the Eurozone’s economy but also ‘in part due to exogenous reasons that have to do with communication. But not by the ECB, but by someone else. This someone else’s communication doesn’t comply with the agreed terms of references.’

During the press conference, the single currency printed a new multi-year high at $1.2537, the highest level since December 16th 2014. Shortly after the ECB press conference, EUR/USD eased to 1.2370 as Trump showed its support for a strong dollar during an interview at the World Economic Forum in Davos Switzerland. On Friday, the currency pair extended gains and climbed back to 1.2494 as the US dollar fell across the board, losing ground against its peers.

It is quite uncommon for Draghi to mention ‘currency war’ during an ECB press conference. It shows that some tensions persist and that international competitiveness through monetary policy is more than ever a hot topic that every single country use it to its benefit but that it is not allow to mention explicitly. Backing publicly competitive devaluation is similar to show support to protectionism in trade policy, you don’t talk about it but you try to use it at your own benefits.

Britain’s economy remains resilient for now

Recently providing December 2017 CPI Y/Y at 3.0% (on line with expectations), December Retail Price Index at 278.1 (consensus: 277.6), December PPI at 0.4% (consensus: 0.2%) and November Unemployment Rate at 4.3% (lowest rate since 1975 and maintained for three months in a row), UK is presenting strong economic data and remains in a comfortable position lately: equities rather present steady numbers (FTSE 100: +20.16% since referendum and -0.42% YTD; FTSE 250: +18.39% and -0.77% YTD); the GBP/USD pair is almost at its level before Brexit referendum (-4.94% since its fall in June – July 2016, at 1.42) and stays admissible for GBP/EUR (-12.73% since referendum, at 1.14), providing valuable exchange rate pass-through advantage; inflation is also stabilizing for the first time in six months (valued at 3.0% in 2017); on the other side however, we observe a sharp decrease in UK GDP growth on a Y/Y basis, valued at 1.70% as of September 30th 2017.

Officially leaving the European Union in March 29th 2019, plan that was confirmed yesterday by Philip Hammond, Chancellor of the Exchequer at the WEF, UK is facing serious difficulties in the coming Brexit negotiation. Firms in the banking industry are also hesitant as to shifting their headquarter out of Britain, a sector that represented GBP 124.20 billion in 2016, 7.2% of total UK gross value added.

Though the UK economics for the 2017 period are positive and give signs of recovery, we prevail a prudent stance, as economic conditions can change very quickly. We are expecting today’s December 2017 GDP Y/Y growth rate to be at 1.50%, among the lowest growth rate within the G20. In our scenario, uncertainty surrounding Brexit outcomes could strongly hamper UK business and household consumption in 2018.