07 October 2019: Another Brexit false dawn?

Another Brexit false dawn?

October 7th: Highlights

  • Sterling rally fizzles out on EU doubts
  • U.S. growth fears hit the dollar
  • WTO Airbus ruling threatens further euro losses

Johnson facing a critical two weeks

U.K. Prime Minister Boris Johnson’s future has become perhaps even more inextricably linked to Brexit then even his predecessor Theresa May’s was. The most crucial difference between the two leaders is that Johnson appears more prepared to go it alone and put his plans forward as complying with the will of the people. May was more driven by Parliament’s wishes.

Johnson’s latest version of the draft withdrawal agreement is expected to be greeted by a lukewarm reception by Brussels and EU leaders.

The proposal of an all-Island regulatory zone to replace the backstop agreement has been dismissed as no basis for an agreement by a European Parliamentary Brexit Committee although no official response has yet been made by the EU itself.

The financial markets have been left dazed and confused by a series of measures and countermeasures as Boris Johnson, at least, careers headlong towards the UK’s departure on October 31st.

While Johnson has confirmed that the Government will write to Brussels requesting an extension to the deadline if no agreement has been reached by October 19th, in almost the very next breath, he continues to that the UK will leave on 31st October with or without a deal.

While the economy has taken something of a back seat during the Brexit negotiations, Bank of England officials are becoming more open about the need for a rate cut following Brexit (whatever form it takes) as the UK’s departure from Europe will significantly affect growth.

The pound gyrated, at times wildly, last week as hopes were raised and dashed. Versus the dollar, which itself was volatile, it traded between 1.2413 and 1.2205. It closed at 1.2334.

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Dollar’s rally comes to an end

The recent rally which had seen the dollar index come close to reaching 100, appears to have topped out at 99.67, its highest level since May 2017.

Successive data releases have led the market to believe that the FOMC will be forced to continue to cut short term interest rates.

Friday’s release of employment data for September was mixed, with the 136k new jobs being created, in line with market expectations, but the August number was adjusted up from 130k to 168k. Since the headline continued the trend for lower data despite the adjustment, the market continued to believe that the economy is slowing, which will renew calls for a third consecutive rate cut when the FOMC meets at the end of the month.

The recent WTO decision regarding Airbus (see below) will be seen by the Administration as vindication of President Trump’s protectionist stance particularly regarding tariffs on imports of Chinese goods. This has led the market to lower its expectations of any significant progress in talks between Beijing and Washington this year.

Along with concerns over trade and the economy, the shadow of impeachment remains over the President. No matter how he is viewed, any disruption to the political process will be sure to influence the markets, particularly with speculation about Vice President Pence’s ability to replace Trump and his viability as a candidate in next year’s election.

Last week, the dollar index traded between 99.60 and 98.63, closing at 98.83.

WTO decision will see euro suffer

After fifteen years of wrangling over whether it is Boing or Airbus who receives the greater state subsidies, the World Trade Organization has come down against one of Europe’s flagship companies.

This will lead to suffering across a wide range of countries and products as the U.S. slaps tariffs on several of its imports from Europe in retaliation.

It is ironic that given the Scottish National Party’s firm remain policy that one of the victims of this U.S. surcharge will be exports of Scotch Whisky to the U.S. The tariff will be up for renegotiation once Brexit has been completed.

While this ruling is a blow to Airbus, the ramifications for the Eurozone economy could be significant. While Airbus itself doesn’t see the U.S. as its primary market given Boing’s pre-eminence, several unrelated businesses will suffer (in addition to Scots distillers) which will add to the feeling that has been seen recently that a large and unwieldy Eurozone is incapable of running efficiently.

While that will lead to further questions over structure, it is the short-term economic situation that is going to concern the market.

This week sees the release of data for German industrial production. The data, released tomorrow, was the first sign of the renewed weakening of the economy last month and was followed by worse than expected activity data. Should the report on industrial production continue to weaken the single currency is sure to suffer as traders fear the worst for the entire region.

Last week, the euro although weakening overall, was primarily reactive to the movements of the dollar. It traded between 1.0999 and 1.00878, as both the support at 1.0840 and resistance at 1.1000 held firm.

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.”