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Market News – 23 January 2017

Last week, Sterling posted its largest single-day gain since 2008 after Prime Minister Theresa May’s Brexit speech. May stated that the UK would leave the EU single market but was interested in a free-trade agreement with the continent.  Germany’s finance minister has urged the UK to look to Switzerland when it comes to its post-Brexit relationship with the EU.

Wolfgang Schäuble hinted the UK should negotiate access to the European single market through a number of bilateral deals in return for freedom of movement.

GBP

Mark Carney stated last week that he would keep a close eye on British consumers this year to see if the improved mood since Brexit continues in the face of higher inflation.

The UK had one of the world’s fastest-growing advanced economies last year, but growth will slow in 2017 as inflation rises. Bank of England governor Carney said there were signs that British growth was relying more heavily on consumer spending, rather than investment or exports.

The UK Supreme Court’s ruling on Tuesday over who has the power to trigger Brexit isn’t the end of the legal challenges facing Theresa May, and might not even be the end of the beginning.

As the government readies for a possible defeat in the argument on whether the Prime Minister or Parliament can start the withdrawal from the European Union, at least three more court cases are looming.

EUR

The European Central Bank kept its main interest rates unchanged last week. Further, it also decided not to change its bond-buying programme, after last month’s extension.

Mario Draghi said the Eurozone economy is stronger, but still fragile. Risks have abated and economic surveys are positive, however there is no time to relax and the stimulus programme must continue.

Any country leaving the Eurozone would need to settle its claims or debts with the bloc’s payments system before severing ties, said Mr. Draghi.

It coincides with a building of anti-euro sentiment in Italy among other nations, fuelled in part by Britain’s decision to leave the European Union.

USD

The Dollar extended losses when Donald Trump’s inauguration speech offered few details on his fiscal policies, fuelling concerns around protectionism.

The greenback slid as much as 1 percent versus the Yen as an Asia-based FX trader said sellers in Tokyo initiated short positions to unwind trades that sought to profit from Trump’s pro-growth stance.

In the US, manufacturing and employment numbers were solid and beat expectations. Philly Fed Manufacturing Index continued to climb higher and unemployment claims beat expectations for a fourth straight week.

Rest of The World

China’s central bank is playing a dangerous game using the country’s foreign reserves to defend the yuan. They are currently being heavily sold in the market, with over $1 trillion deployed since June 2014.

The Japanese government is concerned there may be further sharp falls in their currency. According to a government advisor, they have ‘’several tools in the toolbox’’ to deal with any dramatic fluctuations in the USD/JPY exchange rate. Like many nations, they have their eyes on the US and Trump at present.