Cross Party talks yield no solution
Morning mid-market rates – The majors
April 9th: Highlights
- EU Summit to decide on an extension
- Euro awaits ECB outcome
- Dollar drifts lower as risk appetite improves
No deal still a possibility as EU Leaders gather
There is little doubt that the Summit which begins tomorrow will be faced with a situation which, to a certain extent it has already pronounced upon. It was said at the time of the extension to either April 12th or May 22nd, that there would be no further delay unless the UK came up with a plan to break the deadlock which was supported by a majority of MPs. Despite several sessions between Conservative and Labour representatives, a compromise is no nearer to being found with both sides blaming each other for intransigence.
Theresa May will depart on a whistle-stop tour today where she will meet Angela Merkel in Berlin, the Emmanuel Macron in Paris. The two leaders will, if they stay true to recent comments, present differing views. Merkel has been under pressure from German business interests to find a compromise which allows the UK to leave the EU with a deal while Macron who sees himself as a champion of a more closely integrated EU, takes a tougher line over the UK’s departure.
The pound remains close to the pivotal 1.3000 level versus the dollar. Yesterday it traded in a narrow range between 1.3075 and 1.3030. Overnight it has reached 1.3082 as the dollar has weakened a little (see below).
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Traders not pinning too much hope on the ECB
The latter of those two currently refers to the single currency following its fall over the past few months. That having been said very few traders will buy a currency simply because it has fallen so far. They will tend to “sit on their hands” and await developments. The market remains short of the euro currently and it will take a significant event for it to fall substantially from its current level.
One such event could be tomorrows ECB meeting. While the market is wary of pinning much hope on the Central Banks ability to turn things around economically, being seen to at least acknowledge the seriousness of the current slowdown will go some way to providing a little relief.
A meaningful move, in either direction, will need either comment from Mario Draghi that the situation is likely to improve in the coming months but no action being taken or a radical change where some meaningful stimulus is introduced. This would show the market that the Bank is prepared to accept the seriousness of the situation and act to find a solution.
Traders are unwilling to bet on either outcome in advance, and with the single currency languishing close to the bottom of its recent range it may indeed be that it is “too low to sell” that is its saving grace (for now).
Yesterday the single currency traded between 1.1213 and 1.1275, closing at 1.1264.
Dollar drifting as the market digests NFP
The question of whether the Fed is bringing down the curtain on the most recent spate of increases in short-term rates or it is simply the interval to be followed by further hikes is the long-term driver for the greenback.
Given the rise in global risk appetite, it appears that the market is leaning towards an interval as the global economy starts to pick up. This increase in optimism is driven by expectations of a solution to the trade issues being discussed in talks between China and the U.S. As has been seen in the recent past, there is no guarantee that a solution will be found with both sides used to protecting their position.
Common sense dictates that both sides need to be able to co-exist, if not get along. China needs, on the one side to export freely while on the other, the U.S. needs China to buy its burgeoning debt issuance.
However, with a sabre-rattling President on one side and Chinese inscrutability on the other, common sense may be in short supply.
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.”