Today's markets: But what about the dollar?

President Donald Trump’s tariffs, or lack thereof, continue to dominate stock and currency markets this morning after he spoke to the World Economic Forum yesterday and said he wanted trade relations with China to be fair. Shares in Hong Kong and China rose on the news, up 1.86 per cent and 0.7 per cent respectively in the Friday session. Unless you’re Mexico and Canada, the tariff chat has been relatively calm in Trump’s first week, and much of the global trade war fear seems to have dissipated.

However, this shifting sentiment is moving the dollar, which was bid up quite strongly in the build-up to the inauguration, with traders expecting demand for the dollar to rise as tariffs come in, both in terms of the dollar being safe haven in a global trade war, but also some exporting nations willingly letting their currency depreciate so they can absorb the costs of the tariffs. So since the tariff chat has been calmer, the dollar index, which measures the greenback against a basket of currencies, has fallen 1.8 per cent, another boon to Asian markets. The falling dollar against most currencies, including the pound, is going someway to explain the FTSE 100’s poor performance this morning, with the index down 0.3 per cent, despite its European counterparts in Frankfurt and Paris rising 0.3 and 0.8 per cent respectively, still doing well as Trump ignores Europe. There’s more going on with the UK other than currency, as we discussed below, but a strengthening pound is never helpful. 

The weekend break will mean traders hopefully sit back and assess what next week might bring, rather than reacting to daily announcements from the president. I don’t know about you, but I’m almost missing the ‘good news is bad news’ days when we were obsessed about rate cuts. Speaking of which, next week brings the first Federal Reserve meeting of the year. Now, it’s unlikely to affect markets because, as it stands, there’s as close to zero as possible chance of a rate cut. But it will be interesting to see what the FOMC members say post-decision. In December they made it clear that rate cuts would be slower than markets were anticipating, and this year the inflation and jobs data has convinced markets the FOMC had a point. But has sentiment gone too far the other way? One to watch, but I suspect traders are too focused on other things for it to move shares materially.

Back to London, and the Bank of England isn’t meeting until the week after and there’s plenty for the committee to digest in terms of soft data. Flash PMIs out this morning showed the UK services industry is expanding, but only just, while manufacturing is contracting. The S&P Global/CIPS composite PMI rose to 50.9 in January, from 50.4 in December, above the consensus of 50.1. Parthenon Economics reckons this means the economy has bottomed out, but input costs are rising. Here’s Elliot Jodan-Doak: “All business surveys illustrate the same conundrum for the MPC. Payroll tax hikes, global uncertainty and tariff threats are driving inflation and output in opposite directions. Growth is weak enough to warrant faster rate cuts, but inflation is strong enough to warrant caution.”

So it’s not going to be plain sailing for Andrew Bailey and co. It’s a bad look to cut rates as CPI rises so the MPC is going to have to get the comms right on this. They should be able to look through supply-side inflation, but it won’t be easy. Consumer confidence is also tanking, new data shows, more on that here.

By Taha Lokhandwala