13 Mar 2019: May’s deal voted down

May’s deal voted down

March 13th: Highlights

  • All options still on the table
  • U.S. inflation falls close to Fed target
  • ECB maintaining its “stimulus goals”

Sterling unmoved following vote

The pound gyrated wildly yesterday as the Government’s Chief Legal Expert told the House of Commons that the concessions won by the Prime Minister the previous day didn’t change the legal position of the Irish Backstop agreement. This statement effectively ended any chance Mrs May had of getting MPs to vote to accept the deal.

The Government was eventually defeated by 149 votes, a defeat which leaves just about all possibilities for Brexit still feasible. Parliament will vote later today on a motion to leave in sixteen days’ time with no deal. With no majority in Parliament for such an action, there will be a vote tomorrow on providing the Government with a mandate to return to Brussels to ask for an extension to the triggering of Article Fifty.

As Mrs May rightly said in her statement following the Government’s defeat, an extension will not be automatically granted and Brussels will want to know the purpose of the extension. Furthermore, again highlighted by Mrs May, any extension is no solution to the issue.

As Jean Claude Juncker, the EU Commission President commented following talks with Mrs May on Monday evening, there is to be no third chance. The EU will not negotiate any further and any proposal to end the logjam will have to come with the prior approval of Parliament.

No deal remains the default position of both sides legally and with any extension probably being no longer than three months pressure is going to mount for consensus in Parliament although it is hard to see either side compromising.

Sterling had rallied overnight on news that Mrs May had secured concessions from Brussels although the gains quickly feel away when it became clear that they didn’t go far enough to convince the Brexiteers or the DUP. The “coup de grace” was delivered by the Attorney General when he confirmed to MPs that legally the EU remained in control of the ability of the UK to exit the Irish Backstop agreement were it to be triggered.

Sterling reached a high of 1.3290 early in the day and subsequently fell to a low of 1.3005. Following the vote, it was fairly unmoved. Having closed at 1.3075, it has remained in a 1.3094/1.3060 range since.

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Lower inflation provides FOMC with more breathing space

During a Presidency in which major issues have come and gone at a breakneck speed more akin to President Trump’s business world than the supposedly more considered world of politics, there is finally some time for the Central Bank to consider its options.

Having provided the market with advance guidance that it would now act with patience and become more data dependent and reactive, the economic data released since is both proving Chairman Jerome Powell right and backing his and his colleague’s decision.

The employment report released last Friday was sufficiently ambiguous to allow further consideration while the surprising fall in consumer prices yesterday showed that there is no current need for tighter monetary policy.

The Fed has also paused what seemed to be a headlong rush to reduce the size of its balance sheet. This is a tacit withdrawal of stimulus to the economy but while such action (in growing its balance sheet) is not the “American way,” it was started to provide sufficient liquidity to ensure banks were able to continue to lend during the financial crisis. Since it is a situation that the President inherited, he has been keen for it to remain as it provides a potential boost to growth and economic activity.

The dollar index has reacted to the Fed’s pause by also becoming more stable. Yesterday it traded in a 97.29/96.85 range closing at 97.00.

ECB denies about-turn

The Chief Economist of the ECB, Peter Praet, in comments made yesterday, said that ECB President Mario Draghi was simply maintaining the Bank’s policy of adding stimulus to the economy when it is deemed necessary. The actions were not a “volte-face” in reaction to the slowdown which is in danger of engulfing the region.

“The ECB remains committed to providing whatever actions are necessary to maintain steady growth with controlled inflation. The moving of any rate hike to next year is to be considered the markets perception and any change in the economic situation will be met by a Central Bank ready to take whatever action is necessary to maintain growth and stability.”

It remains almost certain that Mario Draghi will not preside over a hike in rates during his entire term as President which is more an indictment of the fabric of the Eurozone than any comment on his Presidency. The supremely reactive ECB will probably take an entirely new direction as the new President is sworn in and as the candidates are chosen and a selection is made, the market’s reaction will be the most telling comment on the decision of the European Commission.

The euro appreciated yesterday as the dollar continued to correct. It reached a high of 1.1307 before setting back to close at 1.1287.

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.”