03 January 2020: Johnson and Brussels toying with no deal

03 January 2020: Johnson and Brussels toying with no deal

Johnson and Brussels toying with no deal

03rd January: Highlights

  • No deal haunts Sterling
  • U.S. economy building a head of steam, but risks remain
  • German politics as well as economy set to jolt EU

Sterling facing a tough start to the year

Sterling fell back yesterday versus the dollar as fears of no deal being agreed over trade between the UK and EU resurfaced.

Liquidity remains limited but despite this the concerns over Brexit remain. UK Prime Minister Boris Johnson believes that a deal can be negotiated, agreed and signed off before the end of the year. He is so confident that he has said he will not ask for an extension which “places the ball very much in Brussels’ court.”

Ursula von der Leyen the EU Commission President has somewhat tentatively commented that she is more than a little concerned about the timetable. While this may appear to be brinkmanship, market commentators fear a period of sabre rattling before talks start in earnest.

While, during almost the entire negotiation of the Withdrawal Agreement, Brussels appeared to have the whip hand, particularly following the 2017 election, the roles would seem to have been reversed with no deal which ultimately became an empty threat now a potent weapon in Johnson’s armoury. Any no deal scenario would drive the UK closer to the U.S., a position not everyone in the Government appreciates, while industry and manufacturing besides wanting progress also wants to be able to work with their biggest trading partners; the EU.

Yesterday, the reaction to no-deal concerns saw the pound fall to a low of 1.3115 and closing at 1.3137. Manufacturing activity data had little effect on the currency. December output rose marginally to 47.5 from 47.4 in November.

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Risks lurk later in the year

Jerome Powell will have had a comfortable Holiday period as his plans all came together.

Monetary policy is manageable, interest rates appear to be at just about the right level despite a little “background noise” on both sides of the argument. It is expected that Q4 growth will be a little stronger than Q3 and inflation while trending just above the Fed’s target is not a cause for alarm (yet).

When things are as comfortable as they are right now for a Central Bank, the market tends to get just a little twitchy. If we can put aside “black swan” events and believe economics theory that markets move in a cyclical motion, then the goods times cannot continue forever.

The things that analysts are looking for to keep Powell awake at night seem to revolve around four major factors; the consumer, overheating equity markets, a debt crisis and today’s major topic trade.

The housing market has started to gain again following a rise then a flat period. If consumers feel that there remains to be positive (and growing equity) in real estate, they will continue to support manufacturing through a flat(ish) period.

Equity markets have restarted their bull run with the DJI making record highs. Yesterday it reached 28,854 and closed at 28,848.

Just how sustainable is this growth?

Can Q4 results justify this froth? The key remains interest rates and while they are becalmed the answer, according to equity analysts is yes. However, traders look for value versus risk and it is beginning to look like the elastic band that is the DJI is looking just a little stretched.

Yesterday, the dollar index climbed to test resistance at 96.80, reaching 96.87, closing right on the resistance line at 86.81.

The ultimate sanction could destroy Eurozone

For EU read Germany. For EU trade, read Germany. For EU activity, read Germany. For political stability, look outside Europe. Dare we mention the UK election?

The EU is suffering, so is Germany. Berlin has been very quiet over the past few months as it has tried to keep a lid on growing political tensions as its economy continues to suffer.

Angela Merkel will be departing soon, and she has been the glue holding a centrist coalition together for several years.

If open warfare breaks out (figuratively) between the two sides of the political spectrum Germany may face a difficult choice when it comes to supporting a more Federalist EU (centre left preferred position) or a more nationalist standpoint which would require more of a lurch to the right than was seen in the most recent elections.

Mrs Merkel’s open brand of immigration policy is being questioned as unemployment has bottomed out and may start to rise. While it is still well below the Eurozone average it is a number that workers relate to easily and which can easily ignite simmering tensions.

Germany needs surgery as does the entire Eurozone, but can Germany remain the leading light nor does it remain a collective decision. As I said yesterday, any collective decision may be made too late.

Yesterday, the single currency corrected part of its recent rise. It fell to a low of 1.1163, closing at 1.1172. The support at 1.1160 remains in place but, for now, the dollar is the main driver.

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.”