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Supreme Court and Trump First Week

25 January 2017

Jonathan Marriott - Chief Investment Officer

What was the importance of the Supreme Court decision this week and what impact will it have?

In early December, there was a Supreme Court hearing to decide whether the government has the power to trigger Article 50 without it first being approved by parliament. Triggering Article 50 will begin the negotiations which will see Britain leave the EU, as voted for in the referendum last year. On Tuesday, there was a ruling against Theresa May and her government, asserting that parliamentary authorisation is required in order to commence the Brexit process.

This is unlikely to derail May’s plans to enact Article 50 in March. The court unanimously rejected that the Northern Irish, Welsh and Scottish assemblies must also give their approval. This could have caused substantial delays. Whilst a bill must now be passed by parliament, Labour ministers are unlikely to block it. This is because any move to prevent it would reflect badly given that a majority of the public voted for Brexit. Some amendments are likely to be demanded but the overall outlook is broadly unchanged despite the ruling.

In response to the decision, the pound weakened initially before rallying later in the day. The impact on the pound and on markets is minimal, assuming the triggering of Article 50 isn’t notably delayed because of the result. Theresa May outlined her 12-point Brexit plan which appears to be more of a wish list rather than the final outcome. The course of Brexit is still ambiguous despite these latest developments and this uncertainty will continue to move the market in times to come.

The dollar is consolidating this week. Is it the end of the dollar bull market and if so what are the implications for investments?

Since Trump’s election victory in November the dollar has strengthened considerably, driven by expectations of higher growth and reflation in the US. The policies most likely to be implemented by the new President include fiscal stimulus, tax reform and protectionist stances on trade. All of these, coupled with a tightening of monetary policy by the Federal Reserve (“Fed”), mean that the dollar could continue to strengthen further in the coming year. The Fed has indicated its intention to hike rates three times this year whereas other central banks are still operating an extremely accommodative monetary policy. This expected increase in interest rate differentials between the US and other developed markets would be bullish for the dollar.

Having said that, whilst the fundamentals continue to be favourable for dollar strengthening, political intervention could impact the outlook in both directions. The consolidation this week has principally been a reaction to the uncertainty surrounding Trump’s first week in office and comments made by him and his Treasury Secretary nominee, Steven Mnuchin. Together they have fired a warning shot at the dollar stating it is too strong and is hurting the US economy. Given strong fundamentals, we expect that the dollar may continue to strengthen, particularly against the euro and emerging markets currencies. However, we remain cautious of Trump’s comments and actions and their impact on the outlook for the currency.