Markets await some guidance
May 10th: Highlights
- Brexit talks about to collapse?
- Trade agreement on the horizon?
- Inflation to become an issue in the Eurozone?
How do you solve a problem like Brexit?
History will probably congratulate the Labour Party for losing the 2016 election by just enough to keep its supporters interested. The leadership of the Conservative Party was almost handed to Mrs May on a plate, the reason for that has become clear in the ensuing three years.
On what terms the UK will leave the EU is still undecided despite the agreement that was reached between London and Brussels last year. The effect of the entire process should have been devastating for the economy, perhaps even more so than the actual departure itself given the uncertainty it has brought, but today’s Q1 GDP data is likely to show underlying resilience.
The economy is expected to have grown by 0.5% in Q1, leading to a YoY figure of 1.8%. This will be higher than Q4 and will compare favourably with the other G7 countries.
The next two quarters will be critical for the longer term. While it seems that this is a story that will run and run, Brexit will be decided one way or another by the end of Q3. With neither major Party favouring a second referendum, the pressure is mounting for the current talks to yield some agreement. Talks will continue until they can find something that both Partys can agree upon but that does not guarantee agreement from individual MPs.
The Prime Minister is also under severe pressure to stand down but a change in the players in the drama is unlikely to yield a solution. A General Election remains a possibility, but the Cabinet is unlikely to sanction such a move and a motion of confidence in Parliament would be certain to fail again.
Sterling is in a narrow but lower range. Yesterday, it traded between 1.3036 and 1.2967 closing virtually unchanged at 1.3007.
Trade agreement to set tone for the dollar and global economy
It is almost as if the market is driving forward cautiously with its foot on the brake worrying about what is around the next bend in the road. Equity markets are showing signs of having topped out, commodity prices are mixed, and the oil price is struggling to make headway as demand is now being viewed as more significant than supply.
These are tentative signs of concern down the road but it is the trade talks between Washington and Beijing that are most current in trader’s minds. Today is supposed to be the day when President Trump confirms additional tariffs are to be placed upon U.S. imports of a range of Chinese goods. It will be a sign that there has been dialogue behind the scenes if he holds off on implementation.
If the President goes ahead with tariffs, global risk appetite is likely to fall, strengthening traditional safe-haven currencies like the Japanese Yen. The dollar which also tends to gain may see a further sell-off as its global reserve status conflicts with the expected effect on the U.S. economy.
Consumer price data for April is to be released later today. Following yesterday’s lower than expected producer price data, inflation is unlikely to be a factor in the short term. The dollar index closed at 97.46 having recovered from a low of 97.24.
Rising inflation to be the first sign of a recovery
Not so long ago, the spectre of stagflation (rising inflation in a stagnating economy) hung over the UK but that concern has disappeared as the pound stabilized and inflation fell. That is still a fear that is hanging over the Eurozone but if inflation starts to pick up, the ECB will be powerless in the short term to add a degree of control for fear for strangling any nascent recovery.
In what has been a continuing theme for the region we will have to wait and see. The term “benign neglect” seems to have been invented simply to describe the actions of the ECB.
Yesterday, the single currency managed to cling on above the 1.1200 level versus the dollar. It made a high of 1.1251 as the dollar saw some weakness in Asia but fell back to close at 1.1215 as traders became concerned over the imminent decision over trade tariffs.
Next week sees the release of industrial production data for the entire region and sentiment indexes for both German and the Eurozone. While they will not change market perception of the economy on their own, they will add to the picture that is being painted of the prospects for the region.
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.”