06 June 2019: You can’t always get what you want!

You can’t always get what you want!

June 6th: Highlights

  • Fed struggling with credibility if rates must fall
  • Sterling fails to react to U.S. trade deal promises
  • ECB set to meet as data continues to disappoint

Powell set to order a large slice of humble pie

Jerome Powell, the Fed. Chairman, finds himself in an awkward position. It is becoming more likely that the Central Bank will be forced to cut short-term rates to maintain the economy’s upward momentum. The cut will follow a period in which the Fed. raised rates three times to cool off an economy which, it felt at the time was in danger of overheating.

It is doubtful that President Trump will miss the opportunity to gloat over the fact that he believed that the Fed was wrong to hike so aggressively.

Yesterday the monthly preview of the employment report took place with the release of the ADP report on jobs gains in the private sector. It is seen as an indicator of the more widely anticipated non-farm payrolls data that will be released tomorrow. In truth, there is little practical correlation between the two pieces of data other than the entirely obvious fact that they tend to move in the same direction.

The ADP data was uniformly disappointing with the lowest number of new jobs (just 27k) being created in nine years. The number was well below the market’s expectation of a rise of around 180k.

Tomorrows NFP expectations appear to be an exercise in hope over expectation. It is now obvious that the April data was a clear outlier. However, in the current environment, the market will accept that the six-month average is being maintained and that leads to an expectation (hope) for a headline close to +185k.

The dollar index managed to claw back some of its recent losses as the PMI data for services surprised to the upside. Although services are an important part of the economy, it is manufacturing that really “sets the scene”. The index rallied to a high of 97.37, closing just one pip below that point.

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Traders see getting Brexit done as more important than future trade deals

President Trump’s role as the kindly old uncle who promises future Christmas gifts to children who behave themselves today has not had the effect on the pound that may have been expected.

The market is currently far more interested in the answer to a “simple” question: will the UK leave the EU on 31st October with a deal? Yes or No?

As time passes and Mrs May rides off into a bleary-eyed sunset, the task of finding her replacement begins in earnest. The favourite to replace her, Boris Johnson, broke his silence on Tuesday, addressing an election meeting and telling the assembled MPs that the Conservative Party will be destroyed if it does not deliver Brexit by the prescribed date.

The short-termism that has infected politics in the UK continues to hold sway as those MPs canvassed still see the ability to deliver Brexit as the most vital attribute of the new leader.

The inability to look past October 31st and tackle issues such as crime, social welfare and the demise of the high street is being sadly overlooked. The leadership battle has all the hallmarks of the Brexit Party’s recent campaign: one goal, no policy for the future, and no real long-term plans.

The economy remains close to being “on track”. Yesterday’s release of services activity data showed that the sector is still expanding. This was one of the main areas of concern leading up to the original Brexit date as this was the part of the economy most likely to suffer and see migration to Paris or Frankfurt.

Brussels reversal of its decision to not allow Eurozone stocks to be traded on the London market has no doubt helped. The London Stock Exchange is considered the primary market and that will now be continued post-Brexit which is seen as something of a blow to the Frankfurt Bourse.

Yesterday, the pound remained in reactive mode, in the grasp of the dollar but also awaiting some action from the Conservatives. It reached a low of 1.2679 versus a stronger dollar, closing at 1.2684.

Draghi stuck on a “hamster wheel”

ECB president Mario Draghi must feel that life is being condensed into a series of monetary policy meetings that feel like Groundhog Day. Every month he appears in front of Europe’s financial journalists high on the expectation that this will be the month that inflation starts to turn around based upon stronger data only to be disappointed.

It will be the same story today, but Sr. Draghi is starting to add titbits of additional colour. He has started mentioning global trade and Brexit as further negative factors leading to the weakness of the Eurozone economy.

Today he may be able to point to the “bottoming out” of the PMI manufacturing data across the region although it will be some months before he will be able to point to any expansion, particularly in Germany where the most recent manufacturing data still hovers just above 44.

Consumers across the region remain unconvinced having seen particularly poor employment data released by Germany this month. Retail sales fell by 0.4% MoM in May although the April YoY number was revised upwards from 1.9% to 2%. The ECB must take small victories wherever it can find them.

Today’s release of Q1 GDP data will, thankfully, show that the region is still growing albeit at a miserly 0.4% QoQ. With the real possibility that Germany will slip into recession this quarter despite Italy apparently exiting, the Eurozone economy will remain in the doldrums for quite some time to come.

Yesterday, the euro fell versus a marginally resurgent dollar. It reached a low of 1.1219, closing at that level. The downside appears well protected for now with the year’s low of 1.1105 some way away.

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.”