10 February 2020: Brexit trade deal fears hit Sterling

Brexit trade deal fears hit Sterling

10th February: Highlights

  • Boris Bounce to be tested by data
  • Strong employment report boosts greenback
  • Growth friendly budget to allay fiscal unity concerns

France & Ireland to lead fishing dispute

Sterling volatility is increasing with every comment about the trade discussions between London and Brussels. One of the more serious disagreements, which punches well above its weight in terms of economic importance, is fishing. The recent row over EU boats rights to fish around Guernsey was a mere forerunner of the issues that both sides could face going forward and it could be a genuine deal breaker.

France and Ireland backed by Belgium and the Netherlands want to ensure freedom for their fishing fleets to be able to (at least) keep the quotas they already have in place. As the talks get underway, Boris Johnson has pledged to the British fishing industry that they will have far greater protection than they had under EU legislation.

The reason for the issue potentially being far greater than its constituent parts is largely symbolic. As a seafaring nation, This Sceptered Isle will (ironically) fight tooth and nail to protect its borders.

This week is an important week for the UK economically. The release of like-for-like retail sales data at midnight tonight will be the start of a test of Johnson’s Boris bounce. It is expected that the data will fall into negative territory. Following a 1.7% increase last month, a fall of 1% is expected for January.

This will be followed later onTuesday by Industrial and Manufacturing data for January. It is anticipated that both will have improved which should be supportive to a pound which now appears firmly entrenched below 1030 versus a strengthening dollar.

Last week, the pound fell to a low of 1.2882 and closed just three pips higher.

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NFP crowns week of upbeat data

The much-anticipated monthly employment jamboree took place on Friday and, as usual, the headline number was wildly different to the market’s expectations.

By the time the data had been released, the median expectation for the increase in Non-Farm Payrolls was +160k new jobs.

The actual number of new jobs created was (revisions notwithstanding) +225k.

So, 2020 opens with a stronger than expected employment data which rounded off a week of stronger data and helped the dollar to break reasonably strong resistance levels.

Tomorrow, Federal Reserve Chair Jerome Powell testifies before Congress, providing a broad overview of the economy and monetary policy. Powell’s prepared remarks are published ahead of the appearance on Capitol Hill.

Other notable data releases this week include; inflation on Thursday and retail sales and industrial production on Friday.

The employment data also showed an increase in wage inflation which was anticipated but the rate rising to 3.1% was stronger than expected. Weekly hours worked were unchanged at 34.3.

The dollar index rose to a high of 98.71 having traded as low as 97.44. This was its widest monthly range since the week commencing 8th November.

President Trump may be feeling the effects of the rebuke he received from China over the spread of gossip about Coronavirus as he failed to follow through on his self-congratulation following is State of the Union speech, a copy of which was ripped up in the House of Representatives by House Speaker, Democrat Nancy Pelosi while it was being delivered.

Italy facing possible downgrade

“The Government has been unable to generate a feasible growth framework and financial strategy”, Fitch (the ratings agency) said in a statement on Friday, “The high degree of political fragmentation makes it very difficult for the Government to develop a credible growth and fiscal strategy to reduce the stock of public debt”.

France? Spain? Germany? Italy?

Well, it could be anyone one of several Eurozone states, but yes, it’s Italy.

Rome has been at odds with Brussels over the growth and stability pact. They feel that the countries with budget surpluses (Germany) should be doing more to encourage the flow of capital. However, there is possible good news for an Italian Government that has been under pressure over immigration. It may benefit in the shape of amendments to the growth and stability pact that could be announced this month.

If the current predicted upturn in the fortunes of the Eurozone doesn’t materialize, the Ecofin (The Economic and Financial Affairs Council) has agreed preliminarily to increase spending.

Germany remains the biggest worry as its continued poor performance could lead to contagion with a potential recession almost certain to spill over into other nations.

The Eurozone is also going to be more affected than most by the Coronavirus outbreak. Not so much with cases of the growing epidemic but its effect on global trade. Some of the estimates for the hit to global GDP are beginning to look like the precursor for a global downturn leading to recession.

Last week, the euro traded between 1.0942 and 1.1089. It had a distinctly weaker bias which was exacerbated on Friday by the stronger than expected NFP data.

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.”