Daily Market Brief 8 February 2018

Brexit Fears Hit Sterling

February 8th: Highlights

  • Hard or No deal Brexit back on the table
  • Bank of England meeting to accept reality
  • Euro unaffected by German deal

Economic reality starting to bite

The UK Government has commissioned a series of studies in which it has gauged the likely effect of Brexit on regions and industries. It should come as no surprise that no matter what kind of Brexit is finally achieved, the effect on the UK ranges from serious to devastating.

It seems that he hardest hit regions will be the North East of England, the region that was devastated by the demise of the coal and steel industries and Northern Ireland where the uncertainty over the border deal will have a seriously negative impact.

Finally, the market is starting to comprehend two things; first that no matter what kind of deal is negotiated the UK economy will take years to recover from the shock and two, Brussels is in no mood to compromise on any UK proposal. The smokescreen of Michel Barnier asking the UK Government what kind of Brexit it wants masks the fact that the EU is determined to wrest from the UK the City of London’s pre-eminence in Financial Services and at the same time make an example of Britain which will deter any future waverers.

The Pound continues to be caught up in the maelstrom created by the falls in the equity markets this week, but it has clearly returned to its downtrend. It reached a low of 1.3879 versus the recovering dollar yesterday but managed to hold above recent lows versus the single currency retracing part of its recent fall and closing at 1.1320.

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MPC meets as Brexit fears grow

The Monetary Policy Committee of the Bank of England meets later this morning when the Bank will also release its Quarterly Inflation Report. The members of the committee are likely to vote 9-0 in favour of leaving both interest rates and the Asset Purchase facility unchanged at 0.5% and £435bn respectively.

Last week Governor Carney sounded an upbeat message when testifying to a committee of Members of Parliament but since those comments, news surrounding the economy, particularly regarding Brexit has been uniformly poor. Traders will be interested to see if Mr Carney moderates his words which would take talk of a May rate hike off the table. The Bank’s official line on inflation will remain the same; that it will recede over time as the pound recovers, but currency weakness will slow that fall.

Traders have been prepared to take at face value the comments of the Governor given his past record but continually ignoring the potentially devastating effect on the economy of Brexit will damage both his and his colleagues’ credibility. It is hard for the MPC using the limited tools at their disposal to produce monetary policy for such a potentially momentous event.

German Coalition resolution brings greater integration

Finally, Germany has agreed a Grand Coalition that ends the longest period since world War Two that Germany has been without a Government.

Angela Merkel has been accused by sections of her own CDU Party of making too many concessions to her left-wing counterpart at the SPD to stay in power. Although this doesn’t mark a lurch to the left in German politics, despite the SPD providing ministers of Finance and Foreign affairs, it will ensure that Germany remains at the forefront of EU reform as the region takes on Emmanuel Macron’s proposals for greater openness and integration.

The Euro, still correcting following the recent bout of dollar strength fell to a low of 1.2245, breaking strong support at 1.2280. This fall will have been pleasing for ECB President Mario Draghi who was having difficulty allowing policy changes that would have led to further currency strength and a slowdown in economic activity.

Martin Schulz, the SPD leader and foreign minister-designate, said the new grand coalition would signify a “fundamental change of direction in Europe”. “With this agreement, Germany will return to an active and leading role in the EU,”

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.”