Pound pressured by no deal Brexit concerns
August 9th: Highlights
- Perception changes despite no change in two sides position
- Sterling 2% lower since rate hike
- Waning effect of stimulus to slow dollar advance
May to return from vacation to Chequers Proposals in tatters
It is interesting to note that despite the comments of Trade Minister Dr Liam Fox and BoE Governor Mark Carney over the past few days, city economists do not see such a grim picture as they do. Their mean expectation for a hard Brexit is nearer 25% than Fox’s 60%.
While the risk of Brexit is obviously the complete severing of ties between London and Brussels from next March, the reality is more likely to look a lot different, even if it means the EU has to accept that the timetable for negotiation was flawed from the start and it will take nearer five years than two for negotiations to be anywhere near complete.
It is hard to imagine where the two-year period came from. It is entirely possible that a junior bureaucrat took a stab in the dark when drafting the Lisbon Treaty and no one challenged him since it seemed, at that time, that no country would want to exercise its right to leave.
The pound reached a new 2018 low yesterday and has now lost 2% since last week’s rate hike. It fell to 1.2853 before a little profit taking from day traders allowed it to recover to close at 1.2881.
Concerns growing over sustainability of U.S growth
Despite the widening interest rate gap between the U.S. and most of the rest of G7, Trump has been on record voicing concerns over the pace of rate hikes and could pressure Powell to hold off until next year but certainly until after November’s midterm elections.
The dollar index has returned to its well-trod range, still unable to conclusively break the 95.25 resistance. My claim it had the other day was clearly premature!
The index reached a low of 94.99 yesterday and closed at 95.11.
Second half of Q3 to bring greater volatility
Obviously, Brexit will be the main event with a decision on the future relationship due to be ratified by a Heads of Government meeting on 18-19 of October. There is sure to be a great deal of activity before that.
The sustainability of U.S employment growth and wage inflation will have a significant effect on the dollar while in Europe, a slowdown in industrial and manufacturing activity in Germany could spill over into the rest of the Eurozone with a consequent effect on the withdrawal of the Asset Purchase Scheme.
For now, the fate of the euro seems inextricably tied to the dollar as there is very little news emerging from Brussels or Frankfurt.
The single currency rose a little yesterday as a few corporates needing to buy euros saw value below 1.1550 versus the dollar. Against sterling, the euro also rose and is now close to the significant 1.1000 level, having reached a low of 1.1075.
It is hard to envisage any reason to buy euros in the coming months although the lower levels also appear well supported. 2019 will be a different matter as “hats get tossed into the ring” for the job of President of the ECB following the retirement of Mario Draghi.
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.”