Sterling rally continues
4th November: Highlights
- Sterling suffering from a few Pre-election jitters
- Mixed data confirms Fed view
- Lagarde to inspire eurozone recovery?
Johnson Confident of victory and “Getting Brexit Done”
Each of the Labour and Conservative Parties having launched their manifestos for the election that will be held on 12th December accused the other of making unrealistic promises to the Country in order to win support.
First Labour announced plans, valued at around sixty billion pounds to make every one of twenty-seven million homes in the UK “greener” outlininging a plan to reduce the “private” carbon footprint to zero. This has been labelled by the Conservatives as total fantasy. They, the Conservatives, meanwhile, have announced the unfreezing of State Benefits that have been unchanged during the entire period of austerity.
Neither Party can yet claim to be able to fund their policies, each promising to announce their plans in the runup to the vote.
As things stand it looks like a return to the boom/bust economy that has characterized British politics for generations.
While the electorate is held in the thrall of Brexit a lot is being done behind the scenes to provide a stable platform forr the county to move forward post-Brexit,
Boris Johnson’s claims were possibly damaged by a ringing endorsement from Donald Trump who followed up by being less than complimentary towards Labour Leader Jeremy Corbyn.
The Brexit Party confirmeded that they will contest around six hundred seats on December 12th, but it was a surprise when they announced that their leader Nigel Farage doesn’t intend to stand as a candidate.
It has always been a truism in General Elections that unless Labour “win Scotland” they cannot gain an overall majority in Westminster. That is becoming less possible with every election, particularly since the Scottish Nationalists now appear to have a stranglehold despite it being doubtful that they hold a sufficient majority to win “indyref2020”.
Last week Sterling recovered well from the relative surprise that Parliament agreed to hold an election. It again made a high close to 1.30 versus a weakening dollar reaching 1.2976, closing at 1.2935.
Employment in upside surprise.
As I intimated on Friday, the risk for the data was to the upside as traders became possibly a little too bearish following the FOMC. However, given the data was released on the first day of the month there is a real possibility of a significant revision when the next employment report is released.
President Trump is obviously keen for the FOMC to promote a rush for growth that can provide him with some good news with which to camouflage his current problems with impeachment hearings in Congress.
He would also like the trade talks with Beijing to be progressing at a faster rate but as it is in China’s interest to “string Washington along” for as long as possible, progress is being counted by the level of platitudes rather than by any tangible means.
The “economics jury” is out and remain so until at least the new year now, with Fed Chairman Jerome Powell having intimated at his press conference following the FOMC that short-term rates are now on hold while the market ostensibly digests the three cuts that have taken place recently. Cynical analysts will feel that this is another sign of the confused state of the decision-making process and that policy is being made up “on the hoof”
Last week, the dollar index continued to correct breaking support at 98.20 and making a new low of 97.16, closing the week at 97.20. The outlook is for further correction, but a lot will depend upon the way the single currency performs over the balance of the year.
Lagarde taking over at the perfect time?
A reason for the current wave of optimism, which only started on Friday, is perhaps a little disingenuous to the former President of the European Central Bank.
Mario Draghi moved mountains to provide support for the single currency but as his term came to an end he appeared to run out of steam (and ideas) He seemed to accept that the model in its current form was fatally flawed from day one and its only way of survival is what was once considered to be the most radical step of all.
Now, there is no doubt that the Eurozone has managed to back itself into a corner where it is faced with a choice of two paths, both of which are as radical as the other. It either backs away from complete integration or goes full steam ahead into fiscal union . On reflection this day was always coming as again with hindsight, how could monetary union possibly work without unified pensions, taxation and social welfare?
This can only be achieved with a single budget, which was what Sr. Draghi advocated in his farewell address and has been echoed by his successor Christine Lagarde.
Coincidentally, Ms Lagarde may just have come to the Bank at the most opportune moment. Not only is the economy at its nadir but the most recent data releases are showing signs of bottoming out.
This week could be a defining time for the first part of Ms Lagarde’s Presidency.
Manufacturing and services PMIs are released, and should there be even a slight improvement, traders appear ready to consider that the worst is over. That may be premature and only time will tell.
The euro ended last week close to its recent high at 1.1170. It will need to break (and hold) above 1.1220 to see a further rally. There have been several false dawns and the market will need to be convinced by the data if we are not to see another.
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.”