Sterling lower as talks on verge of collapse
May 9th: Highlights
- Brexit mayhem to continue
- Dollar awaits trade news
- Euro barely moves despite upbeat Draghi
May’ s time as Party Leader “drawing to a close”
It all seemed so simple in June of 2016. The UK voted to depart the EU, but not a single part of that process was easy to achieve. Now, as the clock winds down on the extension until 31st October, no deal is again being talked about as the most likely outcome.
Talks between the Government and the main Opposition Party are, according to some political journalists, on the verge of collapse. One participant was quoted yesterday as saying that there has been “zero progress” since the two sides are entrenched in their own dogma.
While it seems logical to have cross-party talks, the more sensible outcome of the stalemate would be talks between those dedicated to leaving the EU and those desperate to remain. It is rumoured that Mrs May will re-introduce her Withdrawal Bill for another vote before the European Elections which take place two weeks from today. They are being labelled as an expensive fiasco which no side wants. The Government is going to receive another “bloody nose” from the electorate while the newly formed Brexit Party is going to receive the benefit of an even more toxic protest vote than was seen in the local elections held recently.
The financial markets remain mired in the continuing mantra of Withdrawal Agreement good, no deal bad, so yesterday’s developments, whether rumour or not, had an adverse effect on the pound. It fell to a low of 1.2987, closing at 1.3007.
The GDP data due tomorrow is unlikely to have a significant effect. A worse than expected number will be excused as a lack of investment due to Brexit while a better one will simply be a lull before the storm.
Greenback takes a breather as Chinese envoy arrives in Washington
The very minimum response by Beijing should have been the cancellation of the latest round of talks that are due to begin in Washington in the next few days. However, Chinese Vice Premier Liu He is in the U.S. and apparently ready to continue talks.
Over the past few weeks, the dollar has become the most active currency in a market in which volatility has suited hedgers far more than speculators. The variety of drivers faced by the greenback contrasts sharply with the single issues facing both the UK and Eurozone.
This has provided the market with a more balanced approach and the dollar hasn’t seen major reversals as each setback has been balanced by positivity in another area. For example, recent strong data for employment and economic activity has been offset by fears that a trade deal may not be close.
Pessimism that a deal can be reached without the need for increased tariffs may be misplaced and the fact that this week’s session will go ahead provides the basis for hope since a breakthrough is only possible when the two sides are still engaged.
The dollar index took a breather yesterday as there was no significant data released, the Fed continued to monitor the market and traders await some outcome on trade. The dollar index was in a 97.68/97.42 range, closing marginally higher at 97.62.
Draghi fast becoming “old faithful”
Draghi must be the most “inflation sceptic” Italian ever as his time in Frankfurt has given him a German view of rising prices.
Yesterday in his speech following the non-monetary policy ECB meeting, Draghi vowed to the fight against inflation despite having already presided over what appears on the surface to be a victory. Sr. Draghi has maintained for some considerable time that the pickup in growth in the region will be preceded by a pickup in inflation., When that comes, and it may not be until after Draghi’s departure, the future incumbent will need to be nimble in his inflation-fighting in order not to choke off nascent growth.
It is somewhat ironic that an ECB President so well known for his concerns has never felt the need to raise rates to combat inflation.
The single currency is trapped between two major forces. To the downside is the concern over future economic activity in the region. Yesterday despite having its growth forecasts downgraded, Germany produced encouraging data for industrial production which allowed the base to continue to form. However, the upside for the euro is currently capped by fears over the global economy and the Sino/U.S. trade talks.
The euro traded between 1.1214 and 1.1182, closing at 1.1198 as the market took little notice of Sr. Draghi’s well-known concerns over the pace of future wage increases.
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.”