11 September 2019: Market’s Brexit nerves holding back Sterling

11 September 2019: Market’s Brexit nerves holding back Sterling

Market’s Brexit nerves holding back Sterling

September 11th: Highlights

  • Johnson remains confident of a deal with Brussels
  • Traders waiting for direction from Fed and trade talks
  • ECB to take rates further into negative territory

Brexit negotiations continue

Following the political uproar that has followed Prime Minister Boris Johnson since he took over from Theresa May, the suspension of Parliament for five weeks may allow MPs to gain a little perspective and reflect upon the effect on their actions.

Johnson remains resolute in his confidence that a deal will be found that can allow the UK to leave the EU on October 31st. The “Backstop Agreement,” which provides insurance that the border between the two parts of the island of Ireland will remain open while a trade deal is negotiated following Brexit, continues to be the main “bone of contention”. In a meeting with his Irish counterpart, Johnson commented that a no-deal Brexit would be a failure of statecraft on both sides and something that he expects to avoid.

MPs do not believe that Johnson is trying to find a solution and that has led to the move to ensure that no-deal is taken off the table as an option.

Yesterday, the opposition Labour Party continued its inability to produce a clear policy or strategy for Brexit. Torn apart by its MPs mostly favouring remaining within the EU while the majority of the membership of the Party voted to leave, the leadership continue to refuse to come down on either side of the argument. This will lead to a confused manifesto when an election finally takes place.

The pound drifted without direction yesterday, as employment data was released. Job creation was lower than expected although this number is difficult to quantify given the Government schemes particularly targeted at the young who cannot find work. These schemes provide training but skew the data since those on them do not count as unemployed.

It was wage inflation that was the most unexpected part of the report. It rose to 4% for the first time since 2008. This is a positive sign although it does indicate that the Bank of England may be faced with a dilemma should the economy slow further following Brexit and higher wages push inflation well above the Government’s 2% target.

Sterling traded between 1.2380 and 1.2306 versus the dollar, closing at 1.2354, just nine pips higher on the day.

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Dollar awaits further direction

The market remains in a state of expectation as further news on trade talks generated by the positive words of the Treasury Secretary hangs over traders. Also, next week’s FOMC meeting is finely balanced. Traders are now convinced that the rate cut that took place at the last meeting will not prove to be “one and done”, as had been considered at the time, as the economy has continued to show signs of weakness.

It may be that the Fed will defer for a further month to gain further data on the economy before “pressing the button again”, although this is far from clear.

There is little doubt that Fed Chair Jerome Powell faces a tricky problem when he delivers a press conference following the meeting. On the one hand, if there is a cut, he will need to ensure that he is not too downbeat about the state of the economy. If there is no cut, he will want to make sure that the Central Bank is not “falling too far behind the curve” and having to take more drastic action should the economy falter further in the coming months.

Traders will be interested to hear more from Treasury Secretary Mnuchin in the coming weeks as he has opened the market up to a degree of positivity over the trade negotiations taking place between Washington and Beijing that are scheduled to reconvene early next month.

Mnuchin intimated recently that the two sides agree over their high-level expectations with negotiators working to agree on the details.

Drivers of the dollar index remain complicated by outside influences while the President remains strangely quiet over the economy. Should the Fed fail to deliver on his expectations next week President Trump will have a “ready-made” scapegoat for any continued weakness.

ECB, still a factor?

There is a thread running through traders’ thoughts that no matter what action the ECB takes on monetary policy at its meeting this week, the Eurozone economy has passed the point where simply adding liquidity and taking rates further into negative territory can pull it around.

As has been the case in Japan for several years, ultra-low or negative interest rates are just one piece of the stimulus jigsaw, and it is vital that the Ministry of Finance works hand in hand with the Central Bank to provide conditions under which business can thrive.

In the case of the Eurozone, one vital piece of the puzzle is missing. The Eurozone does not have a unified Ministry of Finance with nineteen individual Governments each trying to manage their own economies within the confines of the growth and stability pact.

Therein lies the dilemma facing the region. It is doubtful that any of the members of the Eurozone would agree to hand over even more of the management of their economies to a central body as it is clear that “one size does not fit all” and it would simply become yet another political football. While each member of the Eurozone has control over its own destiny it will be impossible for the region to thrive. With the European Parliament fractured following the May elections obtaining progress on what the EU expects to be in five years’ time is painfully slow.

Mario Draghi, the ECB President, faces an issue that is even tougher than his U.S. counterpart this week. He is charged with the task of trying to be positive about the steps the ECB will take while he understands he is sticking a band-aid over a wound which requires major surgery.

The single currency remains close to the 1.1000 level versus the dollar. It appears that is the pivotal point with a fall below leading to predictions of further weakness while when it rises above 1.10, traders start to believe that it is close to a long-term bottom.

Yesterday, it traded between 1.1060 and 1.1030 versus the dollar, closing at 1.1044.

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.”