10 September 2019: Sterling still in the thrall of no-deal Brexit

10 September 2019: Sterling still in the thrall of no-deal Brexit

Sterling still in the thrall of no-deal Brexit

September 10th: Highlights

  • Does Johnson have any further cards to play after election turned down again?
  • Dollar weakens as market leans towards a rate cut
  • Euro reacts to rumours of a German stimulus plan

Parliament suspended as MPs again reject a snap election

Boris Johnson has found himself thwarted at every turn in his efforts to keep no-deal as an option for the UK’s departure from the EU. In order to ensure that cannot happen, MPs have passed a law, which received Royal assent yesterday, to force Johnson against his will to ask Brussels for a further extension should no agreement be reached by October 19th.

In a speech last evening Johnson again refused to countenance any extension to the October 31st deadline leading commentators to believe that he will either disregard the will of Parliament or that he has found a loophole in the legislation that will allow him to continue with his plans.

Parliament sat yesterday for the final time for five weeks as the suspension that caused so much furore recently came into force. The suspension will have little material effect now as the Government has to put its Brexit plans before Parliament. Johnson now has a clear month to work on a deal with Brussels before the EU summit at which he continues to “ expect” a new deal to be ratified.

There was more positive news on the UK economy yesterday as manufacturing and industrial production data were stronger than market expectations. Also, the monthly GDP data showed that the economy grew by 0.3% in July which both beat market expectations and the previous month’s data.

The pound continues to be driven by Brexit with its direction directly correlated to the possibility of the UK leaving the EU with no deal. Yesterday, it reached a high of 1.2385 before drifting back to close at 1.2346.

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U.S. Administration adding to market confusion

Steve Mnuchin, the U.S. Treasury Secretary and one of President Trumps staunchest supporters, added to market confusion over the economy and long-term direction for interest rates yesterday.

Despite continuing to call upon the Federal Reserve to cut interest rates to provide some support, Mnuchin was bullish about the prospects for growth, commenting that the U.S. and China have a “conceptual agreement” over trade and that the economy will not fall into recession.

He went on to say that tariffs that have been placed upon U.S. imports of goods from China are having “no material effect” on the U.S. economy despite data pointing to a slowdown. Anecdotal evidence from regional Fed. Presidents is also leading the market to believe that the Fed will cut rates.

No matter what reasons are given for a cut, the fact remains that unless the economy were to be slowing considerably, the Central Bank would more likely “tough it out” given the inflationary effect of a cut.
The dollar has balanced weaker data and a rate cut with a degree of positivity from Mnuchin’s comments and remains rangebound.

Yesterday, the index traded between 98.51 and 98.14, closing a little lower on the day at 98.32.

Germany to put forward a plan to help the Eurozone?

In what would be a major departure from its previous economic planning and a show of proof about just how serious the situation has become, there are rumours that Germany is about to enact plans to enable Governments to circumvent the growth and stability pact to “borrow their way out of the slowdown.”

In a plan that resembles the “Italian model”, entities without the explicit guarantee of the State would be created that could take advantage of historically low interest rates to borrow for investment in infrastructure and other projects. This could be a major development in the fight to end the slowdown that has engulfed the region virtually since the global economy emerged from the financial crisis.

The market still expects that the ECB will cut rates and reintroduce QE when it meets on Thursday. However, there is also a growing feeling that monetary policy has “run its course” as a method of providing stimulus and that “desperate times call for desperate measures”.

Such a move by Germany, possibly alone but more likely in conjunction with Brussels, would be such a major departure from the inflation fearing conservative economic policies that made Germany a global powerhouse and may be the “shot in the arm” that the Eurozone needs.

It had become obvious that the entire EU experiment was coming close to failure possibly due to the financial straitjacket of a more restrictive than necessary growth and stability pact.

Any new plan will be closely controlled and probably timebound but could be the spark needed to bring the Eurozone back from the brink.

The market reacted with lukewarm positivity to the rumours preferring to see a little more “meat on the bones” of the plan. The euro rose to a high of 1.1068 but drifted back to close at 1.1047.

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.”