Equity markets climbed for the second straight month of the year in February. The global growth in stock prices was elevated by positive investor sentiment, as constructive US-China trade talks continued. Furthermore, the implementation of Chinese stimulus measures created a positive environment for global market growth. The financial markets were not without negative points though. Discussions on trade tariffs are still of contention when reviewing the global economies. In a bid to continue to boost the US economy, trade agendas do not only target the US-China trade imbalances. Goods exported from Europe are also under scrutiny with the US administration considering a tariff on foreign-made cars. However, the promise of Chinese stimulus does have positive benefits to the market. As a consequence, mixed market outlooks driven by various inputs have challenged FX trading strategies.
Looking further into 2019 the view of an additional FED rate hike seems unlikely. As a consequence the FED’s current policy is likely to weigh the Dollar lower. However, monetary easing policies are generally supportive of equities and emerging market debt. By analysing the current business cycle, several factors are supportive to an environment for static rates. This can be supportive towards FX trading strategies and their low correlation to the financial markets. Firstly, the markets witnessed a period of sharp tightening of financial conditions late last year. Moreover, the volatility in risk assets fell, in line with a cooling of global growth. Secondly, economic data releases have supported the view the business growth and investment has moderated.
Brexit uncertainty is weighing on business investment in the UK. As a consequence growth in the UK economy has slowed sharply at the tail end of last year. This slowing business growth can lead to the risk of recession over the next few months. Furthermore, a weakened local currency lowers business sentiment as investors reduce their exposure in the UK economy. The latest figures support this opinion of a slight downturn in business activity. You will have to go back six years to see UK growth rates at these low levels. Meanwhile, government spending had increased over the past 3 to 6 months. We have not seen these levels of government spending since the London Olympics in 2012.
Real GDP growth in the UK has been lowered to levels not seen since the Global Financial Crisis. Slower global business activity has attributed to this economic outlook downgrade. Furthermore, the uncertainty relating to Brexit has compounded this effect. Consequently, a significant fall in business investment in the UK is anticipated during the year. In particular foreign businesses are delaying investment projects in anticipation of greater clarity surrounding the UK’s position towards Europe. This situation will add greater volatility in the Pound’s position in the currency markets. As a result, FX trading strategies should anticipate a weaker Pound against the majors.