04 December 2019: Growth depends on ending Brexit uncertainty

04 December 2019: Growth depends on ending Brexit uncertainty

Growth depends on ending Brexit uncertainty

04th December: Highlights

  • Sterling touches 1.30 as election optimism returns
  • Economy and trade concerns push dollar lower
  • Euro unable to sustain gains

Chain reaction to drive sterling

The UK economy will escape a Brexit driven recession thanks to the General Election being called that will take place in just over a week’s time.

A result that is positive for Brexit which basically means a Conservative victory, will lead to an end to uncertainty over the UK’s departure from the EU. That, despite warnings over Johnson’s deal, will create a more positive backdrop for businesses who will feel encouraged to invest and seek out new markets and customers.

Brexit has become something of an “umbrella” term meaning more than simply the UK’s departure from the EU, although the more “rabid” Brexiteers see the simple fact of the departure as being the entire endgame. There will be a lot more negotiation to take place before a trade deal can be agreed despite Boris Jonson’s claim that there is an “oven ready” deal that is ready to go.

Since the financial markets tend to see such things in a single dimension the Brexit good, delay bad mantra continues to drive Sterling. As I said yesterday there is a degree of caution in the market over the election result that will drive uncertainty until next week.

Friday the 13th could live up to its reputation as the markets come to terms with the result. It is impossible to predict the degree of fall for the pound should there be either a Labour victory or a hung Parliament. It is considered extremely unlikely that Labour can achieve an overall majority if the Scottish Nationalists achieve anything close to their 2017 performance. Equally, a hung Parliament could be considered even worse as it means that Brexit will almost certainly be subject to a further delay but will still suffer from several “fingers in the pie.

The wait goes on. Yesterday, the pound managed to poke its head above the 1.30 parapet making a high of 1.3012 closing at 1.2997. It continues to be driven by one topic; the election and the sub-plot of the single outcome; Brexit.

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Trump’s transparent negotiating skills threaten a delay

It has clearly come to President Trump’s attention over the past few weeks that, in fact, the Chinese economy, in relative terms, is suffering more than the U.S. over the trade negotiations that are currently taking place between Washington and Beijing.

While the effect on the U.S. is limited to pockets of the economy that sell directly to the Chinese, like Soybean farmers, it is broader based for the Chinese economy and its race to manufacturing dominance that is suffering more The Department of Trade recently announced the sale of 68,000 tonnes of soybeans to China in the 2019/20 “marketing season”. That is the first since the present negotiations began. It is significant not for the size of the trade, but more an indication that China “needs” the U.S. a fact that has so far been well hidden.

The fall in growth in China and the effect of tariffs on its export markets are beginning to create cracks in the economy and President Trump is sure to try to exploit them. It is feasible that the rumour that the President is in no hurry to get a deal completed is designed to play on Chinese nerves over the time a deal will take and may lead to further concessions.

As impeachment proceedings start up again this week and recent soft data releases drive the “economic mood lower”, Trump needs to show that his Foreign Policy initiatives are working. His tough stance over the funding of NATO won’t warm up his relationships with Paris or Frankfurt but it will continue his mantra of “making America great again”.

Yesterday, the dollar index continued its recent correction falling to a low of 97.64 and closing at 97.73

Data remains weak but not weaker

This week’s data releases in the Eurozone continue to display a bottoming out of the economy, but do not predict any significant improvement any time soon. ISM and Markit Manufacturing output data remains in contraction despite marginal improvements. Future inflation as illustrated by factory gate price changes remains weak and tomorrow’s release of Q3 GDP is unlikely to change the insipid outlook.

It is probable that the economy will have grown marginally, by around 0.2%, in the quarter to September, with year on year growth reaching 1.2%. As the economy falters, it has entered something if a “dead-zone.

Everyone is waiting for an economic miracle to lift the gloom that surrounds manufacturing while services start to show signs of weakening. Just what Christine Lagarde the great hope of the region is likely to achieve in the short-term remains to be seen. It is all very well, as seen in her recent speeches, to be in the throes of creating a long-term plan, the execution of that plan needs to start sooner rather than later.

Using climate change as a smokescreen to cover a lack of ideas may work for a while, given the emotive nature of the subject, where President Trump can be labelled the villain but eventually, and the time is coming, the economy and possibly the Eurozone itself will reach the point of no return.

Yesterday, the single currency struggled to take advantage of recent dollar weakness, falling back to a low of 1.1065 and closing right on the support line at 1.1080

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.”