12 Dec 2018: Confidence rumours drive pound lower

Confidence rumours drive pound lower

December 12th: Highlights

  • May facing a vote of no-confidence
  • EU Council meeting to highlight issues in Eurozone
  • Dollar ending year on front foot

Prime Minister finds no joy in Europe

Having delayed the House of Commons vote on her Brexit deal, attracting criticism from all sides, UK Prime Minister set off on a “whistle-stop” tour of European capitals yesterday.

Her attempts to try to squeeze concessions from senior EU Officials and Heads of State appear to have been unsuccessful as comment after comment confirmed what Parliament already suspected; the EU is not going to shift on any part of the agreement, particularly the requirement for a backstop arrangement should trade talks fail.

The disappointment and anger from all sides of the House may have produced a sufficient backlash to encourage wavering Government MPs to hand in letters of no confidence in the Prime Minister. Rumours are circulating that the “magic number” of 48 may have now been reached and Mrs. May will be informed of the news upon her return.

The increased turmoil hit Sterling, which was already suffering, hard and it made a fresh low for the year versus the dollar of 1.2481 and despite recovering to close at 1.2497, it has made another low of 1.2480 overnight.

Yesterday’s employment report showed that the rate of wage inflation grew to its highest in a decade as skills shortages start to surface. The positive news had no positive effect on a currency which is languishing under the weight of political upheaval.

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EU Council meeting to discuss no deal Brexit plans

Donald Tusk, the President of the European Council, has called an emergency meeting which will take place over the next couple of days in response to the growing issues facing the region.

For the first time, the Council will discuss preparations for a hard or no deal Brexit as the likelihood that the deal that has been proposed will not be accepted by the UK Parliament. Supply chains, particularly in the auto parts and aircraft sectors are likely to be disrupted and despite assurances from both sides, there will be concern among expatriates living in the UK, just as there will be for UK citizens in EU countries.

The council will also discuss the growing divide between Rome and Brussels over the Italian Budget for 2019 although there have been slightly more conciliatory comments from both sides over the past few days.

The gradual rise in nationalism which has reached new highs following the riots in France over the recent weeks will also be a concern, although it will not be difficult to slow the pace of proposed Federalization until after the elections which are due to be held next May.

The economy continues to concern the Central Bank with a meeting of the Governing Council of the ECB taking place over the next two days as well. There is no chance of any change in monetary policy although ECB President Mario Draghi is likely to confirm that the Asset Purchase Scheme is coming to an end. Draghi is likely to remain dovish in his outlook for the economy but it is doubtful that he will announce any new measures to combat the weakening activity across the entire region.

The single currency reached a low of 1.1306 yesterday, closing at 1.1327. This was in the face of a dollar which has found renewed momentum as the economy may not be slowing as much as was first feared.

Dollar closing the year on a high

The dollar index reached a high of 97.55 yesterday, as the greenback rallied based upon a renewed expectation that the FOMC will hike rates at its meeting next week. It is hoped that the Fed Chair, Jerome Powell, will publish an economic review that allows the Fed to continue to “normalize rates” in accordance with previous forecasts.

However, one of the primary reasons for the rally was in reaction to the continued woes being faced by the U.S.’s trading partners across the Atlantic. As the pound and euro, which make up around 70% of the index suffer the dollar has taken up the slack.

One further cause for optimism around the dollar is the progress being made in high-level trade talks between the U.S. and China. Despite the comments from President Trump that he may trade the freedom of the Huawei CFO, currently under arrest in Canada, for trade concessions which will have inflamed Beijing, a cut in the tariff attached to import of U.S cars and trucks into China is an encouraging sign.

As is normal, the effect of last week’s weaker than expected employment report has worn off and the focus is now switching to the FOMC meeting before the market closes to all intents and purposes for the holiday season.

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.”