Pound still favoured despite spending concerns
10th December: Highlights
- Sterling pauses as profit taking sets in
- Market expects a bullish FOMC
- Eurozone investor confidence in positive territory for the first time in eight months
Polls predict a Conservative victory and Brexit by 31st Jan
The reality is slightly different. Yes, the first stage of Brexit will be completed but the concerns, highlighted by the two main opposition parties, remain valid. Brexit fatigue has meant that the markets have become a little blindfolded to the reality of Johnson’s deal as they become willing to accept anything that gets the logjam cleared.
A minority victory or a hung Parliament are the most insidious conditions for any Government. They become almost driven to accept any compromise to remain in power.
Boris Johnson has not had the ‘luxury’ of a majority at any time since he became Prime Minister and he has also had to deal with rebellious MPs from his own side. The chaos of the past two and a half years has been due to many issues and even though the opposition will ‘huff and puff’, should the Conservatives win a working majority in two days’ time, there will be a period of relative calm as every barb and question is batted back with a simple response pointing to the Government’s majority.
In the longer term once Brexit becomes consigned to the bureaucrats who will create the framework for the trade deal, the Government will be able to concentrate on their spending plans. It remains to be seen just how much of their manifesto is a wish list and how much is a blueprint for the future.
The early days of the campaign always revolve around spending plans and their costings and this one was no different. However, once the dust settles, the reality of paying for 50k new nurses and 20k policemen will set in and Sterling will become more driven by multiple factors as is normal in the financial markets.
All of this assumes a Conservative victory. A labour victory or a hung Parliament will see Sterling ‘fall like a stone’ as either a period of renegotiation will start or ‘horse trading’ will begin in which any policy, whether Brexit related or not, will be watered down.
Yesterday the pound remained strong but suffered from a little profit taking. It traded between 1.3181 and 1.3133, closing a shade higher on the day at 1.3149. 1.3180 is quite strong resistance and it is doubtful that that will be conclusively broken before Thursday.
FOMC to project unchanged rates in ‘20 followed by hikes in ‘21/’22
With the election in the UK, a new ECB President and an FOMC girded by an almost too good to be true employment report, Christmas parties have been put on the back burner as even at this late stage, there is money to be made.
The nature of the market is that it cannot be easily contained and the expectation that the comment by Jerome Powell at the last FOMC that rates would remain on hold ‘for some considerable time’ led the market into a false sense that a period of calm was about to descend.
Weaker data destroyed that premise and before last Friday there were even those who saw a further cut as a (distant) possibility. Following the stellar headline NFP number those same commentators are discussing the next move in rates possible being a hike.
The most popular theory as we enter the final meeting of the year is that 2020 will see rates remain on hold with hikes in both 2021 and 2022.
The minor issue of a Presidential election could change just about every prediction and theory and it remains to be seen the ‘who and how’ of Trump’s challengers. He remains favourite to be re-elected and that is as much a comment on the electorate as his record in office.
The most likely outcome of tomorrow’s meeting is a slightly more hawkish outlook for rates, coupled with continued bullish forecasts for the economy.
The dollar index fell back yesterday as there was little follow through on the data front. It looks likely to remain in a 98.20/97.20 range unless there is a significant unexpected event.
Yesterday it fell to a low of 97.56, closing at 97.65
Despite better investor sentiment, ZEW likely to weaken
Investor confidence is on par in importance with consumer confidence since consumer confidence is a good judge of the spending power of the individual while investor confidence gauges the probability that those who drive private sector spending are prepared to start to invest again.
We have seen several ‘false dawns’ during the present downturn that has come close to stagnation but not yet seen investors ‘pop their heads above the parapet’ until now. This will provide Christine Lagarde with a degree of confidence as she enters her first ECB meeting on Thursday.
There won’t be any radical change to the ECB’s monetary policy for two important reasons; first, despite Ms Lagarde’s more flamboyant approach, she is likely to be guided by her colleagues (for now) and second, there is still very little policy-wise that is available to the Central bank to ‘turn the corner’. There is no doubt that the search has been extensive!
The euro continues as the makeweight in dollar index hedging with little will to drive it in any direction on its own. Yesterday, it rallied a little as the dollar’s correction continued. It reached a high of 1.1079, closing at 1.1065.
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.”