13 Feb 2019: Sterling rallies as May buys more time

Sterling rallies as May buys more time

February 13th: Highlights

  • Parliament likely to agree, despite EU misgivings
  • “Fundamental weakness” to dog single currency for foreseeable future
  • Dollar rangebound between safe-haven bids and offers

May continues to dig a hole but is certain she can climb out

UK Prime Minister Theresa May made a statement to the House of Commons yesterday asking for more time to conclude a deal with Brussels over the Irish backstop. In her statement, she said that negotiations are at a “delicate stage” and that MPs need to “hold their nerve”. This seems to be in complete contrast to the rhetoric that has been emanating from EU officials who maintain that they will not reopen talks since a deal was agreed and signed off on last November.

Mrs. May was accused of trying to buy time to allow the clock to run down and force MPs into deciding between her deal and no deal. This is fast becoming the only choice that will be left to Parliament since even an extension to Article 50 will be difficult to achieve.

Any extension would have to expire before July 2nd. Any continuation past that date will mean that the UK will have to hold elections to the European Parliament and those MEPs will have to sit for the full five-year term irrespective of whether the UK has left or not.

Were the UK to ask for a three-month extension it is likely to be agreed only with conditions. Spain will want assurances over Gibraltar and Germany is likely to attach a demand that the £39 billion “divorce bill” is paid irrespective of the outcome.

The pound managed to rally back to a high of 1.2910 versus a weaker dollar, closing at 1.2895 as traders remain willing to accept that the Government will manage to cobble an agreement that is acceptable to all sides.

Today’s inflation data is likely to see a continued fall in consumer prices although producer prices are likely to have risen following Sterling’s recent fall, pointing to concerns down the road.

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Euro suffering from continuing “design fault”

Despite reaching its twentieth anniversary this year many analysts still consider that the single currency is suffering from significant design fault which continues to restrict its ability to become a strong currency in its own right.

For quite some time, the euro has been little more than a counterbalance to the dollar index, of which it constitutes a little over 55%. Investors see very little benefit in buying and holding euros as there is a continued cloud of doubt over its very existence. On the one hand, very little has been done to integrate the fiscal policies of the nineteen members of the Eurozone while combined monetary policy and extremely tight restrictions on matters such as individual budget deficits mean that traditionally high inflation economies such as Spain and Italy suffer.

It was believed that after the financial crisis that the euro would start to challenge the dollar as a global reserve currency but due to the indecision over the way forward it has only been used as a threat by those at odds with the U.S. such Iran for its oil payments.

The euro stands at a crossroads as questions begin to be asked about the advantage of a single currency which does little more than bond disparate economies together but benefits no one.

In order for the currency to really thrive there needs to be a far closer integration economically which would allow the ECB to control the entire economy as one. However, the degree of mistrust that has grown out of the way the financial crisis was handled means that closer ties may prove impossible. This will leave the euro as a permanent halfway house prone to the issues of the individual economies that make up the Eurozone.

Yesterday, the euro reacted to an end to the dollar’s recent rally and climbed to a high of 1.1341 and closed at 1.1331.

The dollar’s “mini bull run” comes to an end

The dollar’s recent run of higher daily closes was snapped yesterday as a ray of light was seen in negotiations over trade between the U.S. and China. With little to move the market on the domestic agenda for a couple of weeks, trade talks and their effect on the global economy has become the prime focus of traders attention.

In a manner almost like Brexit, this “one driver” scenario has become counter-intuitive for the greenback. Progress in trade talks weakens the dollar while as problems emerge the dollar gains. This is due to the dollars multi-faceted role as both a domestic currency affected by concerns such as economic growth, monetary policy, and inflation, while it is also a safe haven where investors buy U.S. Government debt in times of global stress.

On the domestic front, inflation data will be released today with a 0.2% month on month rise expected, contributing to an annual figure of 2.1%. The advance guidance given by Fed. Chairman Jerome Powell recently means that the market is unlikely to be moved by the data.

Yesterday, a bout of profit taking brought the recent run to an end with the index reaching a low of 96.65, closing at 96.74. This is unlikely to be the start of a trend given the issues that continue to face both the pound and euro.

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.”