10 Dec 2018: Judgement Day approaches

Judgement Day approaches

December 10th: Highlights

  • May facing crushing defeat
  • French social unrest to affect economy
  • Dollar lower as jobs data disappoints

Brexit vote to add to uncertainty

It is close to two and a half years since the UK voted to leave the European Union. Over that period there have been many highs and lows although the underlying feeling in the country has been that having negotiations to leave being handled by negotiators who wish to remain would bring a muddled and confused outcome.

So it has proved with the outcome of tomorrow’s vote in Parliament on the deal that has been agreed between London and Brussels set to both prove decisive for the Prime Minister but also prolong the indecision that has prevailed for some time.

Financial markets thrive on certainty. Long term investors can plan, the currency is stable and the economy thrives. When the opposite is true, as we see now, and for the foreseeable future, the currency suffers as economic activity falls.

Unusually, the vote in Parliament tomorrow is not hard to call as it seems certain there will be a crushing defeat for the Government felt most keenly by the Prime Minister. Speculation around Mrs May’s future continues following her first hint over the weekend that she may not continue after Tuesday.

During the five-day debate, the pound has remained in a relatively tight range but all that may change tomorrow as the uncertainty is “ramped up” to a new level. After the vote the most dramatic possibilities are; Mrs May resigns as Prime Minister and Leader of the Conservative Party and/or the Government faces and possibly loses, a vote of no confidence which leads to a General Election.

Sterling traded down to a low of 1.2710 on Friday closing at 1.2742. It has strengthened a little as the Asian week has begun driven by a bout of dollar weakness.

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French unrest a one-off or a pointer to the future?

The social unrest that has gripped France over the past few weeks has been put down to several factors that appear to stain from the unpopularity of President Emmanuel Macron.

Macron was elected on a unity platform in which he criticized the divisive methods of his opponent, the Right-Wing leader of the National Front Marine Le Pen. Now the tables have turned and the President’s popularity has vanished to be replaced by calls for him to resign.

The riots seen across the entire country have been attributed to an increase in fuel tax which brought protesters onto the streets. However, since the demonstration seen at the weekend were among the fiercest seen so far despite a Government pledge to revisit the fuel tax has kindled thoughts that the protests go deeper and are a statement about the march of Globalization.

The protests while painting a picture of a dissatisfied population have far more serious consequences for the French economy. The higher tax on fuel was to have provided greater revenue for the provision of welfare payments which will now be deferred. It is also probable that M. Macron will have to now assign more of his time to a domestic agenda and spend less time considering the further Federalization of Europe which is now proving to be unpopular with French voters.

The single currency rallied on Friday versus a weaker dollar (see below) reaching a high of 1.1423 and closing at 1.1411. While the outlook for the euro is clouded by French and Italian issues, it is unlikely to fall very far while the dollar continues to correct.

Dollar suffers as NFP disappoints

As expected, the U.S. employment report which was released on Friday showed a correction to the very strong data from October with the headline being adjusted from +250k to +237k. This had an immediate effect on the dollar as did the weaker than expected release for November.

“Just” 155k new jobs were created in November. While this is around average for this stage of the U.S. economic cycle, it disappointed traders who are used to seeing an NFP number closer to +200k.

The increase in average hourly earnings remained at 3.1% this was unchanged from last month and was in line with market expectation.

The most significant question raised by the report is what is going to happen to the FOMC’s rate hike policy.

There has been little movement in expectations for the December hike which, also although not as certain as it was six weeks ago is still likely to go ahead.

Inflation data will be released in the U.S., this week. Although the Fed uses other measures that CPI to measure inflation, the market prefers to use CPI which is both reliable and a market standard.

It is expected that consumer prices rose from 2.1|% to 2.2% in November and this will keep the discussion of the Fed’s rate hike program at the front of trader’s minds.

The dollar index fell following the data, reaching 96.51, closing at 96.60. It has continued to fall overnight., so far (06.15GMT) again reaching 96.51

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.”