Extraordinary times call for extraordinary measures

The fate of the Eurozone hangs in the balance as the ECB meets today. Traders are sceptical that any monetary policy action will be enough to turn the economy around.

The entire region is suffering the stringent rules that have been put in place to ensure that the countries who in the past would have defaulted on debt, devalued their currencies and “started again” become more financially responsible. It is hard to imagine that no one saw the stifling effect the growth and stability pact would have during a prolonged slowdown, adding to the issue rather than helping to prevent it.

The monetary union was aimed at levelling the playing field. However, in economic terms, one size does not fit all and actually inflicting a set of rules that border on the draconian may make the more profligate economies more responsible in “good times.” Alternatively, when the economy turns and the Government has to “take up the slack” due to a slowdown in activity, it is unable to do so.

There is a European summit being held in a little over a month’s time where the Brexit negotiations were expected to be the main topic for discussion. However, changes to, or at least a temporary loosening of the shackles should be on the agenda.

Italy has already put forward ideas about “getting around” the pact and Germany is rumoured to be considering a similar arrangement. It needs Brussels to acknowledge that the purse strings need to be loosened to allow Governments to spend more on infrastructure projects to inject life into individual economies. Such a move would “roll-up” into an increase in overall Eurozone activity.

Yesterday, the single currency managed to claw its way above the pivotal 1.10 level; as traders awaited today’s ECB meeting. It reached a low of 1.0985 but closed at 1.1013.

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Sterling awaits firm Brexit news

The financial markets appear to be becoming as bored with Brexit as the general public in the UK. The almost daily revelations of a deal, no deal, progress in talks, rumours of changes to the most contentious parts of the Withdrawal Agreement, or political subterfuge have grown tiresome.

The UK economy is showing a certain resilience to the uncertainty as the focus remains on the likely effect of leaving the EU without a deal in place. The famous rallying call of Theresa May that “no deal was better than a bad deal” has been turned on its head in recent days/weeks with politicians now believing that “anything is better than no deal”.

It is a matter of the trust, or otherwise, that is placed in the Prime Minister as to whether the UK can leave the EU with a deal. Boris Johnson is still insisting that a deal can be done and that the UK will leave on 31st October.

Parliament, despite now being closed for five weeks, although that decision has been ruled illegal by the courts with an appeal pending, has removed the “politicization” of the entire subject. The opposition parties have “latched-on” to no deal as their “clarion-call” rallying behind the cause with no better reason than to stymy Johnson’s plans.

The disaster of both calling an election in 2017 and its result, where the Government has no majority has led to chaos and the negativity that has grown in recent weeks to any steps to comply with the referendum.

Until there is a positive move in one direction or another, traders have positioned themselves in a reasonably neutral mode. The market is still playing Sterling “from the short side” since Brexit itself is a negative for the economy but positions have been trimmed to take account of minor positives in the economy.

Yesterday, the pound traded between 1.2372 and 1.2312 versus the dollar. It closed at 1.2329 and looks set to have one of its least volatile periods in many weeks although there is always room for a surprise.

Greenback awaits fed action

Since last week’s employment report, coupled with other data which leads traders to believe the U.S. economy is slowing, members of the FOMC appear to have entered something of a period of lockdown.

With traders unsure about the outcome of next week’s Fed meeting the market is in something of a “state of flux”.
Fed. Chairman Jerome Powell has been solid in his comments that since analysts see the same data as Fed. officials, they should be able to make their own minds up about the actions of the FOMC without expecting confirmation.

Unfortunately, the market, which is indeed seeing the same data as the Central Bank, looks at it from a totally different perspective and doesn’t have the insight or depth of data available to FOMC members.

The jury is still out on next week’s meeting with the Administration also giving out mixed messages. It adds greatly to the market’s confusion when the Treasury Secretary concurs with the President’s view that the Fed should be aggressively adding stimulus to the economy while also commenting that the economy is performing well and there is no chance of a recession.

As traders defer to next week’s meeting not taking any large positions, the dollar index remains in a range. Yesterday, it closed at 98.63, having risen to 98.74 earlier in the day. With the single currency making up more than 50% of the index any volatility following the ECB meeting may be reflected through this channel.