11 Feb 2019: May to request further delay

May to request further delay

February 11th: Highlights

  • UK Prime Minister requests an extension on Brexit talks
  • Eurozone data points towards recession despite ECB optimism
  • Dollar continues to edge higher

UK GDP to just about remain positive

The Brexit impasse looks set to continue until the end of the month.

UK Prime Minister Theresa May, having made no progress in Brussels will ask Parliament to provide her with two more weeks until she has to report back. The Opposition is set to table a motion which will force a vote by February 28th, that will allow Parliament to put forward suggestions to break the deadlock.

With just six weeks to go before the UK officially leaves the EU, either an extension to allow for further negotiations or a no deal outcome appear to be the only options remaining.

The financial markets have been unusually reticent since the beginning of the year to act upon their instincts as traders find a no deal outcome difficult to imagine but remain only cautiously optimistic that a deal can be struck.

This week sees the release of GDP data for Q4 and following last weeks BoE meeting it is sure that Governor Mark Carney gave sufficient advance notice for the market to believe that there will have been growth in the economy no matter how small. The expectation is for GDP growth to have been 0.2% in the period from October to December contributing to a year on year figure of 1.4%.

The Bank cut its growth forecast for 2019 to 1.2% at its meeting, which virtually assured that there is to be no increase in short-term, rates this year.

The pound had a dismal week last week reacting to Brexit uncertainty and a dovish Bank of England. It reached a low of 1.2921 on Friday, closing at 1.2935. It has started the week in Asia on a similar footing, drifting back towards its recent low.

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ECB confident that “slowdown” will not be prolonged

It has clearly been agreed between members of the Governing Council of the ECB that the “R-word” (recession) is not to be used. They have decided to use the term slowdown for the malaise that is growing within the Eurozone.

It is probable that at some point in the coming months Italy, France, Germany, and Spain will all be in a technical “slowdown” having exhibited two consecutive quarters of negative growth. The ECB’s current growth forecast for the Eurozone as a whole for 2019 is 1.5% which currently seems almost impossible to achieve.

With fallout from Brexit still to be entirely factored in and despite the ECB only being interested in data that covers the entire nineteen members of the Eurozone, a technical recession no matter how shallow is almost unavoidable.

Benoit Coeure, the former Chief Economist at the Banque de France and now an ECB Council Member, commented last week that the “slowdown will probably be “broader and longer lasting” than previously imagined but more data is required before it can be agreed that it will be “ lasting and serious”. It is hard to decipher just what he meant but it seems that a slowdown or recession is now accepted as certain and it remains to be seen what tools the ECB can develop to counter the issue. The ECB was slow to respond to the financial crisis so the market will need to be convinced if the single currency is not to fall well below the 1.1000 level in the coming months.

Last week the euro remained in its recent downward trajectory. The upturn in fortunes experienced by the dollar was a major factor but disappointing data releases were the main contributor. It fell to a low of 1.1320, closing the week just two pips from its low.

This week’s industrial production data is likely to be weak but possibly a little less weak than December’s numbers. This may provide a little relief for the single currency but that will be short-lived.

Dollar awaits new factors to continue its recovery

The dollar index continued in its move higher last week as the greenback benefitted from continued weakness elsewhere.

The continued fallout from the FOMC and a somewhat confusing employment report have set the tone for traders to await fresh developments.

The dollar index reached a high of 96.69 and appears set to test its recent high at 97.71 as it continues an almost one-way path so far in 2019.

This week’s release of consumer inflation data will give a clue to the Fed’s thinking. Although CPI has fallen away a little as the FOMC’s favoured indicator of price data given its backward-looking nature and a rather narrow basket of goods, the market still uses it for comparison purposes. It is expected that CPI will remain at +0.2% month on month contributing to a fall in year on year data from 2.2% to 2.1%. That is close enough to the Feds target of 2% to not cause any concerns and keep the pause in rate hikes firmly in place.

Producer price data will be released later in the week. This is a more forward-looking report of both future manufacturing activity and price pressures and will be eagerly awaited by the market. At the end of the week, industrial production data is due and this is expected to show a similar outcome to December, having grown by around 0.3% in January.

Fed Chairman Jerome Powell will be making a speech tomorrow evening and traders will look for any change in his recent tone. Powell, as a lawyer in his previous life, is well aware of the need to project his message both in use of language and nuance to avoid any false impressions.

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.”