UK to take part in EU elections
May 8th: Highlights
- Optimism over a cross-party deal fading
- Trump’s rhetoric over China met with stony silence from Beijing
- Eurozone growth forecasts slashed
Brexit conundrum becoming impossible to solve
David Lidington, the Prime Minister’s de facto deputy, said he hoped that the MEPs would not be required to take up their seats in Strasbourg. Traders took this comment with a “pinch of salt” and sold Sterling to a low of 1.3039 versus the dollar.
With pressure building on the Prime Minister to announce her departure date, it seems that any chance of the two sides reaching an agreement is fading. With October 31st as the date on which the UK will leave the EU, it is certain that Brussels will not allow any further extension, it is likely that the current Withdrawal Agreement will be put before MPs again in order to have one last try to get it passed. If that is again rejected, then looks like a straight choice between no deal and a second vote.
That decision may not be made by Mrs May as her Party considers her failure to oversee an orderly departure from the UK.
GDP data for the UK will be released on Friday with Q1 QoQ growth expected to be at 0.2%. It is doubtful that this will have much of an effect on the pound since recent data has proven that Brexit remains “the only game in town”.
The pound rallied from its low late in the day on a bout of profit-taking and closed at 1.3076.
Beijing watches and waits
The threat of higher tariffs being levied on U.S. imports of a range of Chinese goods this week remains in place but China’s chief trade negotiator, Vice Premier Liu He, is still heading to Washington. It is pretty obvious that Beijing is treating Trump’s outburst as little more than a negotiating tactic and not the most subtle one at that!
The dollar index has continued to be volatile, although it remains in its recent range and the slow but steady uptrend created by growth comparisons and Central Bank expectations continues.
Attention will turn back to the economy in the next couple of days as inflation data is released. Although CPI is not the Fed’s favourite measure of price pressures in the economy, the market still sees it as a “broad brush” estimate of the direction of inflation despite it being backwards looking.
Producer Prices will be released tomorrow, and any slight increase will alert the Fed to future inflation (in whatever form) and will be supportive for the dollar. There is a clear expectation given the Fed’s ambiguous position that inflation is on the rise and Friday’s CPI is expected to show inflation back above 2% YoY in April.
The dollar index traded between 97.78 and 97.34 yesterday but closed just four pips above its opening level at 97.57.
Eurozone dependent upon trade pickup
The downgrade was less severe than the previous report which was released in February for all members except for Germany, where growth expectations for 2019 were lowered from 1.1% to 0.5%. BMW concurred with this estimate, labelling the current trading environment as “challenging”.
The single currency resumed its decline following the report but there are so many factors driving the market it is impossible to focus on a single report, comment, or piece of data. The euro fell to a low of 1.1165 but rallied a little to close at 1.1191. It has remained close to that level overnight although it has managed to claw its way back above 1.1200.
Mario Draghi, the ECB President, will face the press today following the Central Bank’s non-monetary policy meeting. He may present, as he often does, a slightly more optimistic picture of the future.
It is likely that the group will still discuss the same topics, but may not vote on any change in short-term interest rates. For several months (possibly years) it has been Draghi’s view of the economy that has been the most significant part of this gathering.
Today, he will continue to assert that the economy will improve once the global economy starts to pick up and trade flows improve. That, of course, depends to a large extent on what happens between Washington and Beijing.
In the meantime, Draghi will be able to point to a better than expected GDP figure and slightly higher inflation as the “green shoots” of the recovery.
The ECB is being forced into a period of benign expectation forced upon them by the fiscal set-up of the Eurozone. That is unlikely to change in the foreseeable future.
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.”