Brexit concerns turn domestic

It turns out the Theresa May’s supposed victory at the meeting of influential MP’s a few weeks ago was indeed little more than them “giving her enough rope to hang herself”. Although the details of the latest version of the Brexit agreement are yet to be published the public are fast being made aware by MP’s that if there is an agreement it must be a further capitulation.

The deal that is struck to keep the border between the UK and Ireland open will be interesting since both sides are committed to finding a solution but it is the backstop agreement, which determines that it will stay open into the future, that will be where the concessions have been made.

Michel Barnier commented last evening that the main components of the deal were ready giving a boost to the pound only for it to retreat again as a spokesman for Mrs May denied this was the case.

This continued to and fro must end soon with a draft agreement being published and then the focus of the entire process will shift to Westminster where political carnage could ensue. The two main parties’ whips (who try to ensure that MP’s vote as demanded by their Parties) will be defied as never before as what could turn into a version of as free vote takes place.

On the Government side, both remainers and Brexiteers will defy the Government and attempt to vote the agreement down if it either ties the UK to Brussels, via the backstop agreement, indefinitely, or fails to deliver the terms that the British people voted for. The opposition being “whipped” to vote against may see some MPs vote with the Government since there is support on that side of the House for any deal that keeps the U.K. close to Brussels thus, in their eyes, protecting trade and jobs.

The pound was battered again yesterday by a strengthening dollar reaching a ten-day low of 1.2827 before closing at 1.2853.

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France voices breakup concerns as euro makes new lows

The French Finance Minister, Bruno le Maire voiced his Government’s concerns over the possible breakup of the single currency yesterday but his worries stretched further than the imminent start of round two of the battle between Rome and Brussels over the Italian Budget for 2019.

M. Le Maire was voicing his concerns of the ability of the euro to survive another financial downturn without a greater financial integration which provides a unified fiscal policy and budget. “Failure to reach an agreement may leave the eurozone without sufficient defensive weapons to defend the currency. The time for talking is over” Le Maire said.

Germany which through its promotion of the Eurozone has seen support for its domestic Government crumble is wary of committing to further cooperation which could lead it to greater financial responsibility.

Traders took Le Maire’s words and filed them under a heading “For Future Consideration” as they see the Italian Budget as sufficient reason for now to divest themselves of long euro positions. With the deadline issued by Brussels for Italy to amend its budget set to expire, and Rome becoming, if anything, more entrenched, seemingly supported by its population, the stalemate is unlikely to be broken any time soon.

With monetary policy also unsupportive, the euro fell through the year’s low and opened the possibility of reaching 1.1000 versus the dollar before year end, a level not seen since May last year. It reached a low of 1.1233 closing just a few pips above that level.

Dollar powers on but for how much longer?

The dollar rose again yesterday with the index reaching another high for the year of 97.70 but has given back a little of the advance overnight as profit taking set in. The dollar’s rise over the past couple of months has been driven by the markets perceptions over interest rate differential but as we enter 2019, that could change.

Clearly Sterling will be driven in the short/medium term by the political fallout from Brexit but the Bank of England has already given advance notice of rate hikes following the departure from the EU provided there is a smooth transition (something that admittedly looks unlikely right now).

If the euro can get past the short-term issues of the Italian Budget then during 2019 (the sooner the better as far as Germany is concerned) the ECB will start to hike rates. Meanwhile Mario Draghi will need to balance growth and inflation considerations to ensure the economy doesn’t weaken into recession although the weakening currency will aid export growth.

The stronger dollar is seeing a significant downturn in equities both at home and in the emerging markets. This is sure to bring a response from the President, particularly since the FOMC has already signalled that rates will continue to rise.

There is enough effect being felt from day to day issues and economic releases but into yearend a story of dollar strength with a weakening euro and a pound which flip flops on rumour and counter rumour seems to be emerging as the most likely scenario.