Sterling reacts badly to a long delay
April 8th: Highlights
- Yet another big week for Brexit
- U.S. employment back on track
- Can the ECB light a fire under the euro?
FX Market becoming as confused as Parliament
That whole idea was shot down on Friday as the idea of a long Brexit delay, an outcome seemingly favoured by many EU members, saw the pound fall back to its recent lows.
Versus the dollar, it reached 1.2987, within a whisker of its apparent strong support at 1.2980.
Traders are beginning to look beyond Brexit now and see a country irrevocably divided with the two main Parties not only as far apart as ever but split internally by infighting which has been highlighted by Brexit, but which has also brought long-held differences to the surface.
A General Election is this week’s most prominent option. It seems that every new week brings a new favoured option. It takes over from no deal which in turn replaced a popular vote.
The EU Council will meet this week to decide on Mrs May’s request for a delay in Brexit until June 30th. If rumours are to be believed, France and Spain are both against the continual piecemeal extensions and will only agree to a year-long extension.
However, no extension is going to be agreed unless the UK has a plan, supported by a majority of MPs on how to break the deadlock. This is, therefore, a big couple of days for Mrs May and Opposition Leader Jeremy Corbyn. Both leaders are under significant pressure from within their own parties for collaborating in the first place.
If the cross-party talks fail, it will favour Corbyn as it will almost certainly lead to a General Election with Labour currently ahead in the polls, although in the current climate that may not count for much.
Fed’s pause just about justified
196k new jobs were produced in March, beating the long-term average. February’s 20k was revised upwards to 33k.
While this improved read was welcomed by the market, it added to speculation over the Fed’s next move. With three weeks to go until the next Fed meeting, economic data releases between now and then will be scrutinized for clues as to whether the Fed has paused its rate hike programme or if the current slowdown in activity is likely to continue.
This week sees the release of inflation data but given the benign read for domestic expenditures seen recently, CPI is unlikely to trouble the Fed.
Producer price data will also be released this week. This will be benign, illustrating the lack of pressure on the Fed from prices going forward.
The minutes of the most recent FOMC meeting will be released on Wednesday. These are expected to show a degree of unity from committee members with agreement on the pause to rate hikes being tempered by a willingness to act should the economy move away from the Fed’s most recent projections.
The dollar gained initially from the employment report with the index reaching 97.47 although it quickly ran out of momentum closing at 97.40. It has retraced some of those gains so far today as Asia has opened for the new week. The index has fallen to a low of 97.23 so far this morning.
ECB meeting to disappoint?
The short-term direction of the single currency will be determined by how the ECB reacts to the slowdown. If they behave with their usual “hand-wringing” and plaintive hope for a turnaround, the euro will resume its downward spiral making fresh lows for the year. It will only be in the unlikely event that a fresh dynamic approach is introduced that traders will be sufficiently enthused that the currency may start to gain.
The Eurozone is wallowing in bad debt which is restricting banks’ ability to lend, so providing cheap funds to the system is not going to produce the desired effect. A more accommodative approach to the fiscal situation by stimulating public spending within the wider economy is one of the few options left to the Central Bank.
Italy, for example, produced a budget which raised its debt to GDP ratio to 2.4% of GDP by increasing public spending but this was rejected by the EU and subsequently reduced to 2.04%.
It is only by allowing more flexibility that the region will avoid a significant recession even if that could be construed as storing up issues for the future.
On Friday, the single currency traded in a 1.1248/1.1210 range versus the dollar and closed virtually unchanged at 1.1217. Overnight, it has rallied a little reaching 1.1233 so far this morning.
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.”