04 Feb 2019: Sterling volatility on the rise

Sterling volatility on the rise

February 4th: Highlights

  • Weak business surveys drive the pound lower
  • Mixed employment report reinforces Fed caution
  • Eurozone growth concerns continue as Italian recession confirmed

Brexit realities start to bite

The financial markets are reacting to what seem to be two very different visions of the UK’s departure from the EU. The Government is playing a kind of “fantasy Brexit” in which it remains fixated upon the backstop agreement and reopening talks with Brussels whereas the reality is leading firms to move production away as no deal becomes seemingly more likely with every day that passes.

Nissan, which has been promised a £60 million “sweetener” to increase production in the UK following Brexit announced over the weekend that the production of a new model was to take place in Japan and not Sunderland as had been promised.

The company announced that industry-wide concerns over production of diesel vehicles were a factor but Brexit also weighed heavily upon the decision.

Sterling has become more volatile as the market’s concerns over the continued uncertainty grow. In January the pound had its biggest monthly rise in a year, while last week saw its biggest fall in seven weeks.

Traders place a very low possibility on the Prime Minister being able to obtain any change in Brussels’ position but remain optimistic that a deal of some sort can be done. That sums up the market’s position perfectly as the clock winds down.

The pound fell to a low of 1.3043 on Friday before recovering to close at 1.3082. It has barely moved from that level overnight.

The Bank of England’s rate-setting Monetary Policy Committee meets this week with a 9-0 vote for rates to remain unchanged the almost certain outcome. The market’s interest will be piqued by the statement following the meeting from Governor Mark Carney who will probably comment on the likely scenarios facing the UK following Brexit.

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Employment report backs FED’s caution

The U.S. employment report is a highly volatile collection of data prone to major revisions which make it virtually impossible to predict. The Dept. of Labor prides itself on getting the data to the public on the first Friday of every month but the market would mostly prefer accuracy to speed.

It is obvious that the closer to the first day of the month the first Friday is, the more estimates are contained in the report.

Friday’s release saw December’s headline number which was considered at the time it was released to be either stellar or unbelievable was revised down by close to 30% to +222k from +312k. This led to the January number being “taken with a pinch of salt” as it again reached the stellar (or unbelievable) level of +304k.

The unemployment rate rose to 4% while wage inflation remained stalled at 3.2% despite an upward revision of Decembers data to 3.3%.

The dollar index traded in a narrow range between 95.40 and 95.66 closing almost unchanged at 95.58, as the market was left confused over how the economy is faring following an inconclusive FOMC meeting.

There is very little positivity over the relationship between the President and Congress which is considered to be an “accident waiting to happen” as the three-week hiatus over the Federal Shutdown comes to an end on February 15th.

Italy officially in recession as growth falls across the Eurozone

The continued economic malaise that is affecting the Eurozone claimed its first victim from the four major economies last week as Italy fulfilled the official requirement for a recession, namely that it had successive quarters of negative growth or contraction.

Italy has become the symbol of all that ails the region as its economy contracts, its budget deficit grows and it is saddled with a debt to GDP ratio of 130%+ which continues to rise.

It is likely that France and Germany will follow with Spain almost certainly already in recession. Ireland faces an economic catastrophe should a no deal Brexit come to pass with Greece and Portugal teetering on the brink.

Against this backdrop, it seems that the Brexit advantage could easily swing towards the UK as larger companies across the region cast an envious eye upon the UK which despite the uncertainty created by Brexit still manages to grow at twice the rate of the Eurozone.

Manufacturing surveys across the Eurozone continue to fall into contraction with only France remaining above the crucial 50 level last week.

Producer Price data will be released later today with factory gate prices predicted to fall by 0.6% as the grip of the slowdown tightens. Further data releases this week will see services activity manage to hang onto marginal expansion while retail sales look likely to have fallen 1.6% in December leading to a YoY reading of just +0.5%.

The single currency traded between 1.1488 and 1.1434 on Friday, before closing marginally higher at 1.1459

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.”