11 Dec 2018: Sterling hit hard by vote delay

Sterling hit hard by vote delay

December 11th: Highlights

  • May to return to Brussels to discuss backstop
  • Dollar rebounds as rate doves retreat
  • Euro gains limited by French and Italian concerns

Prolonging the agony

U.K. Prime Minister Theresa May finally admitted yesterday that the agreement negotiated between London and Brussels has little or no chance of being accepted by MP’s. She postponed the vote which was to take place later today in a move which has been labeled as either cowardice or pragmatism.

The financial markets took a dim view of further uncertainty with the pound making a fresh low for the year versus the dollar and a three-month low versus the single currency. It reached lows of 1.2506 and 1.1004.

It is hard to see a way out of the issue of the backstop for Mrs. May. Critics of the agreement have coined a new term, labeling it BRINO (Brexit in name only) while a succession of European leaders, including Donald Tusk and Angela Merkel (who Theresa May will meet later today), are queuing up to say that the deal that has been agreed is the only one on the table.

A delay in the vote has bought Mrs. May more time but it is hard to comprehend its purpose.

Further negotiation seems out of the question with her only option appearing to be to appeal to Brussels concerns that a hard or no deal Brexit will affect the EU even if it is not as catastrophic for them as it will be for the UK.

Parliament is now in a state of limbo with the delay being criticized from all sides. The Speaker of the House accused the Government of being “extremely discourteous to Parliament”, just about the strongest language he can use.

The outlook for Sterling is now precarious. There is no reason for any kind of optimism with 1.2000 and 1.0000 a distant but eminently reachable target versus the dollar and euro.

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Dollar gains as rate hike hopes re-emerge

The dollar index rallied yesterday as expectations that a further rate hike in the U.S. this month and three more next year will widen the interest differential between the U.S. and other G7 nations grew.

Despite global growth concerns rising, the outlook for the U.S. economy still looks reasonably strong with 2018 growth likely to be well in excess of 3% and despite a probable fall in 2019 still closer to 4% than 3%. When contrasted with other G7 nations like Japan (1.1% in 2018), The Eurozone (2.1%) and UK (1.3%), it is clear that the U.S is less likely to suffer a significant downturn.

The dollar index rallied to a high of 97.24 yesterday, driven mostly by the fall in the GBP, and closed within five pips of that level. Last Friday’s poor headline employment data was shrugged off as traders took more notice of the wage growth data which remains above 3% despite employment being at record highs.

There is now a far more positive attitude in the market towards next week’s FOMC where not only will rates almost certainly be hiked, but the Fed will publish its economic projections for 2019.

European Federalists facing a nationalist backlash

Emmanuel Macron and Angela Merkel, the Political Heads of France and Germany, are confirmed European Federalists, with Macron, in particular, believing that all that ails Europe would be solved by a more closely integrated EU. That attitude has led to headaches for both leaders recently.

Despite the riots that afflicted most of France last weekend being about fuel tax rises on the surface, an underlying feeling of nationalism is starting to spread throughout the Eurozone’s second-biggest economy. While the blame for inciting the unrest is placed at the feet of the opposition National Front Party, M. Macron faces a tough winter to survive as his approval rating plummets.

Brussels, still facing the difficulties of Brexit, must still deal with the issue of the Italian Budget that has been conspicuously avoided for the past few weeks, while keeping an eye on what is happening in Paris and across France.

Faced with an economic slowdown and a Central Bank that has no further tools to affect growth, the Eurozone could be heading for a recession if the Q3 growth data is a reliable barometer of economic activity. The fall in the currency may help export recovery but it may lead to an uptick in inflation which the ECB will be pressured to contain as sooner rather than later.

The single currency fell to a low of 1.1350 yesterday, closing virtually on its low. As liquidity thins out with the approach of the festive season, next week’s inflation data may cause a ripple through the market with headline CPI expected to have risen to 2.2% from 2.00% last time.

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.”