05 September 2019: No-deal? No more!

No-deal? No more!

September 5th: Highlights

  • Johnson on a losing streak
  • FOMC members pointing to another cut
  • Euro teetering on the brink

MPs vote to make Johnson ask for a Brexit extension

As Prime Minister Boris Johnson’s options narrow, he is left with a General Election on October 15th as his only way of avoiding the humiliation of going to Brussels to ask for another extension to Brexit, something he has vowed not to do.

Opposition Parties have forced the Government to accept that until legislation that removes the possibility of no-deal is passed they will not agree to a General Election. Late last night a deal was agreed in the Upper Chamber of Parliament and the Bill will be passed before Parliament is suspended next week clearing the path for an election to be called.

The pound continues to rally as no-deal becomes less possible and analysts begin to concentrate on possible election outcomes. The ruling Conservative Party would almost certainly remain the largest Party although their support has slipped since the 2017 election. However, whether they would achieve an overall majority is “too close to call”.

The main opposition party, Labour, has slipped further than the Government since 2017, with two “minority Parties”; Brexit and the Liberal Democrats both making significant gains. It is expected that in a General election, the Liberal Democrats could get 19% of the vote and Brexit 11%, although how that would translate into seats in Parliament is impossible to predict.

Having briefly fallen below 1.2000 earlier in the week, the pound continues to recover as no-deal fears fade. Yesterday, it reached a high of 1.2258, closing within two pips of that level.

Mark Carney, the Governor of the Bank of England, confirmed yesterday that analysts at the Central Bank have concluded that the effect of a no-deal Brexit would be less severe than had previously been predicted. This is due to the amount of work and investment that has been put into the issue. That is now a moot point since it now seems no-deal like the Withdrawal Agreement is “dead in the water”.

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Trade talks to resume but neither side is confident

Yesterday’s announcement that trade talks between Washington and Beijing will resume next month gave a boost to riskier assets although the two protagonists see little hope for any kind of far-reaching agreement since the talks do little other than “scratch the surface” of the major issues between the nations.

China continues to plan, preferring to “play the long game”, securing the supply of raw materials in Africa having already virtually “annexed” Australia. The efforts of the U.S. to maintain its global presence are more “obvious”, particularly while President Trump remains in office.

There is little doubt that while the two sides continue to talk there is a possibility, however remote, of a deal getting done although a major breakthrough is unlikely.

Several FOMC members made speeches yesterday. James Bullard, Charles Evans, and Neel Kashkari, the Presidents of the St. Louis, Chicago and Minneapolis Federal Reserves, each supported further rate cuts to varying degrees. Bullard and Evans are current voting members of the FOMC while Kashkari is an alternate.

Bullard favours “aggressive” cuts, Evans is concerned that there are more “systemic” issues within the economy than simply a global slowdown, while Kashkari feels that using rate cuts to offset essentially trade issues is a poor use of a significant tool.

Following weaker than expected manufacturing data earlier in the week, the focus will now turn to tomorrow’s employment report. The latest estimates put the headline at a little below +160k although, as ever, traders are prepared for a shock in either direction.

Today’s release of private-sector employment data will provide a “curtain-raiser” for tomorrow’s “main event” although there is little correlation between the two reports.

The dollar index continues to “shy away” from the 99 level that was touched earlier in the week. Yesterday, it fell to a low of 98.39, closing just about at that level.

Eurozone GDP is unlikely to provide any cheer

The latest cut of growth data for the Eurozone will be released tomorrow morning and it is expected to remain at 0.2% quarter on quarter, leading to year on year growth of 1.1%.

This is obviously data which is “fast disappearing in the rear-view mirror”, with the economy almost certainly having slowed even further in the current period.

Despite the euro falling to lows not seen in two and a half years, traders have entered an almost resigned phase with little expectation being placed upon the meeting of the ECB which will take place next Thursday in Frankfurt.

Mario Draghi, the outgoing ECB President, is unlikely to have to rehearse his speech too much since it is difficult to imagine it being any different from the past two or three he has made.

While the ECB is expected to crate policy with one hand tied behind its back, governed by the well-known systemic fiscal straitjacket the Central Bank operates under, it is hard to see the Central Bank being able to “innovate” its way out of the current situation.

Despite its now almost twenty-year existence, the region’s growth in terms of evolution appears to have stalled with new nations seemingly content to take rather than contribute either financially or culturally.

The Eurozone is in danger of losing any hope it had of creating an identity and more prominent members such as Italy continue to rail against Brussels, not helped by the parlous state of their own economies.

Yesterday, the single currency rallied to a high of 1.1039 versus a weakening dollar although it continues to fall back from its recent highs versus the pound. Analysts estimate that if the UK can extricate itself from the EU with a deal, the pound could rally by more than 5% versus the euro.

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.”