March to see increased volatility
March 4th: Highlights
The first week of the new month is likely to see an increase in volatility.
The major drivers of the financial market will be:
- Brexit negotiations and the approach of a “meaningful vote”
- The U.S. employment report for February
- An ECB meeting which will determine new monetary accommodation
No deal not an option to Remainers
The decision taken by Prime Minister Theresa May to confirm a “meaningful vote” would take place should MPs continue to vote her deal, as amended, down, has provided a boost to the pound which had been driven by “deal or no deal”, for some time. Now, it still is not clear what kind of Brexit will actually be achieved, or whether the country prepared in any way for the wider Brexit experience.
While the past few weeks have been taken up by interminable negotiations between London and Brussels, the “return of the Backstop” will take centre stage again. It is unlikely even now that unless there is a legally binding mechanism for leaving the backstop, Brexiteers will vote against May’s deal.
Sterling has now reached its logical pre-Brexit range and the level it would have been trading on had the “May Plan” been adopted the first time. Most analysts would have placed the pound between 1.3000 and 1.3300 with less than a month to go before Brexit. Now that no deal is sufficiently done away with, we are at “neutral”.
So, where do we go from here? The potential is still to the downside since the UK will almost certainly face the economic uncertainty of departing the single market and customs union. As Mrs May’s now departed negotiator commented, “if the UK is not going to leave those two, what is it leaving?”
On Friday, the pound traded between 1.3171 and 1.3286, closing at 1.3202.
Wounded Trump blames everybody
Unable to bend Kim Jong-Un to his will, President Trump rounded on just about everyone else in a wide-ranging rallying cry to his supporters. In a two-hour speech to a Conservative rally upon his return, Trump railed against the investigation into collusion with Russia and made attacks on former Attorney General Jeff Sessions, former FBI head James Comey, the Democratic Party, and those critical of his approach to North Korea.
For financial markets the major interest in the longest Speech of Trump’s Presidency was a renewed attack on Jerome Powell and the Federal Reserve. He commented that the strong dollar is hurting U.S. competitiveness. This he attributed to tight monetary policy. Growth data released on Thursday showed that the economy grew by 2.6% in 2018 following 3.4% growth in 2017. On the surface, Trump is correct that increasing rates have slowed the U.S. economy despite his stimulus and tax cut measures taken earlier in 2018.
It is a conversation to be held between the Treasury and the Federal Reserve as to the level the administration requires for the dollar since the Treasury is responsible for the currency.
This week sees the release of the February employment report and it is expected that 200k new jobs will have been created although it is revisions to previous months that will be most widely anticipated. With the report being issued at its latest possible date, there is a degree of hope that it will be accurate.
The gap between prices and wages is an important factor and it is expected that wage inflation will remain close to 3.4%.
The dollar index climbed to a level of 96.55 following the positive GDP data and closed at 96.47.
ECB to address the economic downturn
Against a political backdrop which is becoming more and more hostile to the further expansion of the Eurozone both in terms participants and ideology, the ECB is facing a downturn which is in danger of becoming a full-blown recession.
While the economy has passed technical tests, the odd point one per cent of growth here and there within the larger nations does nothing to hide the fact that the single currency experiment is beginning to fail. It is clear that the half-way-house of the monetary one size fits all policy that the ECB subscribes to does not work for such diverse economies.
Italy is ground zero for economic diversity within the Eurozone. In economic terms, Italy had the most to gain from being a member of the Eurozone, yet it is has been the joint biggest loser financially (with France) from membership. It has a debt to GDP ratio of 132.1% and a budget deficit which it plans to reduce to 2.04% in the coming years. The coalition Government in Rome is creaking with the junior member “League” doing well in recent elections while support for the senior partner “Five Star“ almost collapsed.
This week there is a real possibility that the Asset Purchase Plan which was ended in January will be reintroduced but it is not the availability of liquidity that is the issue this time around, it is the deficit of credible borrowers since the Eurozone banks still have 944 billion euro of bad loans on their balance sheets.
On Friday, the single currency traded down to 1.1353 and closed at 1.1364.
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.”