01 Apr 2019: Sterling Dives as No Deal Beckons

Sterling Dives as No Deal Beckons

March 29th: Highlights

  • MPs rejected the Withdrawal Agreement for a third time
  • U.S. data continues to predict a slowing economy
  • Eurozone manufacturing data to show a continued slowdown

Parliament facing the point of no return

The third defeat for the Prime Minister’s Brexit Withdrawal Agreement has plunged the process into even greater confusion, if that were possible. The defeat was clearly seen by the Financial Market as the point at which a no deal Brexit becomes, not inevitable, but far more likely.

Indeed, no deal is being put forward to Mrs May as an option she should consider.

Parliament will repeat the indicative vote process later today and on Wednesday by trying to ascertain what it is that MPs can agree on. That, however, is a futile task since the options on the table will, mostly, be unacceptable to Brussels.

Two senior Brexiteers changed their allegiance and voted for the Withdrawal Agreement on Friday. Jacob Rees-Mogg and Boris Johnson both with an eye on the “main chance” of becoming the leader of the Party, apparently preferred the current deal to a “softer” Brexit which is an option also being considered.

Sterling had a precipitous fall versus the dollar. Prior to the vote, it had been under considerable pressure but once the result was official it fell to a low of 1.2977 although it rallied to close at 1.3034, just ten pips lower than where it opened as it bounced off its 200-day moving average.

This will be another volatile week. Should no deal become more likely, Sterling will suffer badly and a conclusive break of 1.2980 could lead to a fall to 1.2820 or lower.

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Data-driven dollar barely reacts to controlled inflation

The dollar index finished the first quarter on the front foot but most of its rally on Friday was due to the weakness of both the pound and euro.

Core Personal Consumption, the Fed’s preferred measure of inflation fell from 2% in December to 1.8% in January adding to the view that the Fed has been right in its move to pause its normalization of monetary policy. Consumer sentiment improved slightly which added to the dollar’s positive perception.

This week starts with manufacturing activity indexes which are expected to have risen slightly in March to 54.5 in March from 54.2 in February. This will indicate that the economy is still expanding although at a slower rate than in Q3 and Q4 of last year.

The notoriously fickle data for durable goods orders will be released on Tuesday. It is too early to expect any fallout from the issue Boing is facing although activity in the production of “big ticket” items is expected to have slowed.

The employment report will be eagerly anticipated prior to its release on Friday. Following the surprisingly low new jobs created figure of just 20k in February, there is an expectation that there will be a significant adjustment plus a number for March closer to the six-month average which is around 175k.

The dollar index is stuck in a narrow yet positive range, mostly due to the issues facing the euro. It is unlikely to move out of a wider 97.60/96.60 range without a major event taking place.

Market anticipating poor manufacturing data from the Eurozone

The market has now become so accustomed to poor economic activity data being released by Eurostat that it has reached the point that the euro is unlikely to fall much further on a poor number.

This, conversely, means that they are unlikely to add to those positions unless there is a truly horrendous number. However, should there be a marginal improvement seen, it may alter sentiment a little with short positions being trimmed.

Data for manufacturing output will be released for France Italy and Germany this morning as well as for the entire region. Forecasts are for there to be little change for the three major economies but for a slight fall for the region. It remains to be seen if that is enough to arrest the euro’s recent fall.

Data for inflation will also be released and should allow the ECB to add accommodation to the market without the fear that inflation may suddenly become out of control. The economy is certainly pointing to the need for a boost rather than any need to be cautious over prices, despite Mario Draghi’s assertion that wages are on the verge of a significant rise.

The single currency closed a little lower on Friday at 1.1218 versus the dollar a fall of 29 pips having traded a range of 1.1247/1.1209.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”