11 Mar 2019: The Point of No Return

The Point of No Return

March 11th: Highlights

  • No Deal back on the table
  • Dollar retreats as NFP disappoints
  • Paris/Rome row set to split Italian coalition

Sterling suffering as “meaningful vote” approaches

Sterling has continued its recent fall as the market opened this morning in Asia.

Comments over the weekend from political figures involved in the Brexit process have added to the tension over tomorrow’s vote in Parliament. It is clear that the EU is not going to budge in its contention that the deal that was agreed late last year is the only one on offer.

The consensus is that the deal will be again be rejected by the House of Commons when the vote takes place, possibly by as large a margin as the original vote. This will mean that the past two months or so have been as much of a waste of time as was predicated given Brussels’ intransigence. If/when the deal is rejected there will be one, or more likely two, further votes.

On Wednesday there will be a vote on whether to leave with no deal. If that is not passed, there will be a vote on Thursday on extending the execution of Article Fifty. Any extension will have to be short-term as the European Parliament Elections take place in two months and the UK is not involved.

While no deal does not command a majority of votes, it will become the country’s default position unless there is a law change to allow for an extension and that is by no means certain to be passed.

This week will be vital for the fate of the pound with sentiment turning away from optimism to realism. Last week’s volte-face by Bank of England Governor Mark Carney where he halved the “hit” to GDP from a no deal Brexit from 4.75% to 2.5% may be of little comfort to UK businesses who will suffer not only from the effect of Brexit but the uncertainty that has been growing during the process.

Overnight, the pound fell to a low of 1.2960 and is currently (05.30GMT) trading at 1.2977. It now seems to be firmly entrenched below 1.3000 but any positive news from Brussels would quickly reverse traders negative positions.

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Disappointing NFP data a blip?

The markets’ fascination with the U.S. employment report has always been in direct contrast to the reliability of the data. The headline number for new jobs created is notoriously fickle and subject to revisions of up to 30%.

Friday’s report showed that the U.S. economy created just 20k new jobs in February while the January number was revised up from 304k to 311k. It is such a difficult number to predict (as was seen on Friday) that market analysts have taken to simply using the six-month moving average of the data as their prediction. It is therefore of no consequence that the February headline was so far below the expectation of the market, which, incidentally, was for 180k new jobs.

Wage inflation, which has been growing consistently, was again higher in February, reaching 3.4% from a downwardly revised 3.1% in January.

The market’s reaction was fairly muted despite a knee-jerk selloff in the dollar index which reached a low of 97.24.

Traders are far more interested in the more significant drivers that will affect the FOMC’s thinking, which is now “patient” and “data-dependent”. The data dependency will revolve around trends, particularly in inflation where they concentrate upon the PCE (personal consumption expenditures) information, which gives a broader basis to household costs than the more traditional yet narrower consumer price index.

Given the issues facing the pound and euro which make up close top 70% of the dollar index, it is unlikely that the dollar will fall much further despite having barely moved from its Friday close of 97.37 overnight.

Euro falling as ECB does all it can

The European Central Bank has historically done all it can to avoid being considered politically motivated in its actions. Its President, Mario Draghi, has consistently maintained that his job is to provide a monetary platform for the entire region to experience consistent growth and to control inflation. He says that the performance of individual nations is nothing more than academic interest.

This may appear to be naive given the clear differences in the drivers of activity in different States and the varying influences. However, Draghi has always maintained the independence of the ECB, so it is ludicrous to suggest that there was any outside political interference in the Central Bank’s decision to end its Asset Purchase Programme in January. What is obvious is that the underlying strength of the Eurozone economy was considerably overestimated and the negativity created by Brexit was not limited to the UK.

So, on Thursday, the ECB reacted as it knew it had to by reintroducing stimulus which may have only limited effect until there is both more clarity over Brexit and the global economy starts to pick up. This is mostly dependent upon both the risk appetite and confidence generated by an agreement on trade between the U.S. and China.

Following its fall on Thursday in the wake of the ECB meeting, the single currency remained weak on Friday, although it managed to rally a little as the dollar reacted to the employment report. It reached a high of 1.1246, closing at 1.1231. It has barely moved from that level overnight.

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.”