Sterling rally continues
11th December: Highlights
- Conservatives maintain 10% advantage
- Trump & Economy set for tough 2020?
- Little change expected from ECB
Conservative majority now ‘base case’
It is difficult to imagine Labour pressing on with Corbyn if he fails to win what a few months ago was considered an eminently winnable election. Labour will be at a crossroads in opposition. Its socialist ideals have fared badly even when in Government for thirteen years in the Blair/Brown period with what was considered ‘socialism light’
The Conservatives have been severely wounded by the infighting that culminated in mass suspensions from the Party for ignoring the whip over Brexit. Many of those suspended MPs are standing as independents while others have decided enough is enough.
Today’s weaker than expected data has done very little to dampen the market’s enthusiasm for Sterling, this is, as they say in politics, a good week to hide bad news’.
Next week, provided the polls are not wildly inaccurate, will see some form of Brexit bill presented to Parliament. While it will be a period reminiscent of the past few months, there will be confidence that it will pass and allow for departure on the 31st of January.
Yesterday, Sterling continued to rally making a high against the dollar of 1.3215 and closing at 1.3189, just below significant resistance.
Some cold water was poured on the possibility of a significant majority late in the day with the publication of an opinion poll that puts the two parties much closer than previously indicated. The YouGov poll puts the Conservatives at 339 seats, down from 359 and Labour rat 231, up from 211. Sterling reacted unfavourably to the news, opening in Asia a little lower.
FOMC to advise caution as risks skewed to downside
With typical bluster, the President advised Congress to try him ‘sooner rather than later’, and called the investigation a witch hunt.
Meanwhile, the longer-term outlook for the economy is under the microscope and it is not exactly favourable. It is very difficult to predict economic activity more than six months in advance, particularly for a country so diverse economically as the U.S. However longer-term expectations are considering a recession late next year.
Lagging indicators like inflation and employment appear to be showing a positive outlook. However leading indicators like activity, consumer confidence and housing starts are starting to cause concern.
Despite the un-inversion of the yield and continued positive jobs growth, the economy may start to turn at the start of Q2 causing the Fed to reconsider its next move(s) in short term rates.
With markets fearing uncertainty above all else, the growing possibility of impeachment hearings and the possibility that the Administration may well not defer further tariffs on Chinese imports after December 15th (Trump may try to use a tough stance on China to deflect his concerns), an increase in volatility is expected early in the coming weeks.
Yesterday, the dollar index gave back most of its gains from the employment data. It traded between 97.66 and 97.40, closing at 97.44
ECB overshadowed but still important
Christine Lagarde will chair her first meeting as President. She will be aware of where the more hawkish and dovish members of the committee are from. She may try to appease the hawks which may send the currency higher. However, it will take actions not words to turn around a fast stagnating economy.
In her maiden press conference, Lagarde will probably continue the themes of greater domestic consumption and further loosening of the shackles on public spending but will steer clear of reform until she is able to agree a united front with EU Commission President.
Interest rates will remain on hold until the President of the Central Bank can formulate a strategy in conjunction with the bank’s economists.
Further stress tests on banks are possible in order to try to free up room in troubled balance sheets to enable them to lend more.
The single currency gained again yesterday from the dollar’s weakness. It reached a high of 1.1098, closing at 1.1092
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.”