Brexit Row Overshadows Talks
May 2nd: Highlights
- Junker claims May in “dreamland”
- May dismisses reports as gossip
- “One sided version” promotes EU fears
Smooth Brexit negotiation “unlikely”
It was never going to be in the interests of the European Union to make a single country’s departure either easy or smooth. The accounts that have emerged in the press of a dinner between Theresa may and Jean-Claude Juncker underline the difficult path that lies ahead.
The report outline Juncker’s scepticism over the U.K’s negotiation stance particularly the handling of the question of EU nationals in the U.K. and any fee or fine paid upon departure.
In response to Mrs May’s comment that she wanted to make Brexit a success, Juncker commented that “Brexit cannot be a success”. Those five words outline the EU’s position as wanting to be awkward, difficult and obstructive as negotiations begin.
Britain is likely to be used as a warning to the other 27 members of the union. This will be similar to the treatment of Cyprus during the financial crisis but the outcome will be vastly different.
The pound continues to gain strength from the likely outcome of the General election being held on June 8th. The destabilizing effect of Brexit is seen as being some way in the future and traders are immunized against knee-jerk reaction to every rumour and piece of gossip.
The 1.3000 level against the dollar is the next major hurdle. For now, second quarter sales orders set between 1.2925 and 1.2975 are creating resistance. It is a similar story against the Euro although other influences are driving the pair. The single currency is struggling to hold onto gains above 0.8475 but strong buying interest is seen below 0.8475.
FOMC Meeting to provide guidance not action
Data has been mixed recently. Preliminary GDP data released last week showed that the economy grew at 0.7% in Q1 down from 2.1% in Q4 ‘16 and appreciably lower that expectation which was for a 1.2% rise. Factory activity slowed in April, while data showed consumer spending was unchanged in March. An important inflation measure, personal consumption, fell MoM for the first time since 2001.
The main take-away from the FOMC meeting with be advance guidance on the Fed’s actions for the remainder of the year. Data is pointing to a single further hike. The likelihood, however, is that Janet Yellen will confirm what we all know; that the Fed will be “driven by market forces”.
Dollar index flat as factors balanced
Fiscal and monetary policy decisions tend to weigh less on the dollar than other currencies due to the global nature of the dollar’s use.
Trade remains the number one factor but with the trade deficit virtually unchanged at $44 bio monthly any effect is diminished. Outside influences whether they are directly affecting the dollar like North Korea or indirectly like Brexit, drive its value more than employment data or other domestic activity.
It is bizarre that even as the U.S. exports its manufacturing base to cheaper labour areas in Asia and Central America, they maintain that it is their choice. It is difficult to see where the administration is going with threats over currency manipulation and other restrictions given it would be impossible to shift manufacturing back.
This week’s events of note
- Public Holiday in Many Markets
- U.S.: Manufacturing activity report – Forward looking report. Underpins monetary policy.
- Japan: Bank of Japan Minutes – Any discussion of easing of non standard measures?
- U.S.: RBA Rate Decision – Still too early for a rate hike despite RBA Gov. saying rates have bottomed.
- Eurozone: Non monetary policy meeting – Difficult to say what they talk about.
- Eurozone: Consolidated GDP – Expectation for unchanged 1.7% growth YoY.
- U.S.: FOMC Meeting – No further hike expected but look out for hawkish tone in statement.
- Australia: RBA Governor speech – Expected to comment on RBA rate decision and maybe provide advance guidance”.
- U.S.: Trade Data – Gaining in significance following Trumps interest. An unchanged deficit of $44bn expected.
- U.S.: Employment report – Is it that time again already? Watch for a large revision to March’s surprisingly low number. Unemployment rate likely unchanged at 4.5%.
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.”