Sterling falls as vote nears
Morning mid-market rates – The majors
January 9th: Highlights
- Parliamentary dithering continues
- Global and domestic considerations leave the dollar in a narrow range
- German data continues recession concern
Brexit proving an impossible hurdle
It seems that there is simply no way to leave the EU without causing economic and social disaster and it is entirely possible that the vague yet convoluted terms set out in Article 50 of the Lisbon Treaty are intended to have just that consequence.
It is becoming more obvious that the myriad terms and requirements of the treaty were never expected to be used in practice as it was considered highly unlikely that any nation would choose to leave the EU of their own volition.
The UK Parliament returned to its debate on Brexit yesterday and the Government immediately lost a vote on an amendment that was tabled by a cross-party group which gave MPs more power over Government actions in the case of a no deal Brexit.
The debate and votes on minor amendments are simply the hors d’ouvre before the main event which takes place next Tuesday. The Prime Minister appears to be no closer to gaining the support she needs to pass her draft agreement and Sterling’s volatility is bound to be ramped up further as the time approaches.
Uncertainty is a major driver of volatility and while there is little doubt that no matter the political and social effect, economically a no deal Brexit is the worst of all worlds. It stokes uncertainty, creates havoc in industrial and manufacturing logistics and removes easy access to the UK’s biggest export market.
It is hard, if not impossible, to make a case for a stronger pound following a no vote in Parliament, it simply depends on just how “short” traders are as to how far the pound can fall in the short term.
Yesterday, the pound fell to a low of 1.2706 before closing at 1.2720. It also gave back recent gains versus the single currency, falling to 1.1102 and closing at 1.1118.
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Dollar losing momentum as Fed support wanes
While there is significant disagreement between the Fed and the Administration over the Fed’s actions, a correction in asset markets was always the likely outcome of the sun setting on a period of extremely loose monetary policy, possibly the loosest ever.
It was interesting that President Trump managed to hold back on picking up on Jerome Powell’s lack of experience, as a lawyer rather than an economist, having himself appointed Powell. He clearly considered his loyalty to the cause a more significant attribute than his background.
A correction in the stock markets and a weaker dollar are not major issues for the U.S. economy yet and it could easily emerge from a period of uncertainty stronger overall since bubbles in an economic cycle rarely end well.
The dollar is now entering a period of consolidation where its support will depend on both the performance of the economy (which following last week’s employment report is doing rather well) and the appetite for risk that is created by various global issues, not least trade between China and the U.S.
Yesterday the dollar index rallied reaching 96.03 before closing at 95.92.
Germany continues to fall towards recession
It is obviously the intention of the ECB that individual states performance will eventually be considered in a similar light to that of, for example, Ohio or New Mexico in the make-up of the U.S. economy but the Eurozone is many years away from that level of Federalism. The performance of certain individual Eurozone countries clearly has a greater effect on the economy both literally and in terms of sentiment, than others.
Yesterday, the market was expecting German industrial production to return to positivity after a fall in November. As it turned out, November’s data was revised lower from -0.5% to -0.8% and December’s production fell by 1.9%.
Today, German export and trade data will be released and the market is poised for a further fall in economic activity.
The single currency has so far taken the slowing Eurozone economy in its stride as it is already weak versus the dollar in historical terms. It is significantly below its 100-month moving average which is currently at close to 1.2350.
Yesterday the euro fell to a low of 1.1422, closing at 1.1444, still well above the long-term target of 1.1000.
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.”