Brexit Confusion Continues
October 4th: Highlights
- Johnson backs Florence speech, Davis prepared to walk away
- Data continues to demonstrate economic weakness
- Catalonia independence “in days”
Conference speeches confirm muddled thinking
This all but confirmed the muddled thinking and dubious reasoning that is pervading the Government with a hard Brexit becoming more of a possibility every day.
Sterling has almost become immune to talk over Brexit, now only reacting to the effect it is having on the economy and future monetary policy. It has also become reactive to drivers of other currencies. Versus the dollar, the pound fell yesterday reaching a low of 1.3222 as rate hike expectations drove the greenback to six weeks highs versus a basket of its trading partners currencies. The common currency clawed back some of its recent losses despite the recent political upheaval. It reached 0.8883 versus Sterling although any follow through is likely to be limited given the political headwinds now facing the region.
Monetary Policy still the prime influence on currencies
The Fed has started already and will likely follow up the start of the reduction in its balance sheet with a further rate hike in December. The U.K. is toying with a rate hike next month try to control inflation, but with every new data release the reasoning behind a hike becomes more blurred. ECB President Mario Draghi has been clear in his desire to keep rates on hold and to provide a “level playing field” to all Eurozone members and now with the return of political uncertainty a change in monetary policy is even further in the future.
Janet Yellen has now been put in a particularly invidious position with the names of her likely replacement being discussed when it hasn’t been officially confirmed that she won’t be reappointed. The Heads of the BoE and ECB are beginning to reach the end of their terms. Draghi will be leaving the ECB (to be most probably replaced by the President of the Bundesbank) in December 2019 with BoE Governor Mark Carney will leave his position in June of that year. This was supposed to have been after Brexit but with a transition period likely to be agreed, his successor will be plunged into a difficult scenario.
Euro calm as Catalonia continues independence plans
The President of Catalonia has declared that he will announce independence from Spain in the “next few days”. Carlos Puigdemont encouraged by the overwhelming result of the vote while the king of Spain has described the Catalans as acting outside the law and called the situation “extremely serious”.
The Euro has barely reacted to the threat of Catalonian independence yet as traders digest the significance to the entire region. It is the greater political significance particularly if it does fuel further revolt across Europe that will concern Brussels.
In a note to clients recently, Barclays Bank said that the threat of independence in the near term is close to zero!
An independent Catalonia would not be an EU member and any application to join would most likely be vetoed by Spain. This would leave them outside the single market with all the ramifications that have become all too clear recently.
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.”