Brexit turmoil set to continue
January 14th: Highlights
- Parliamentary vote set to bring chaos
- Italian data further cause for Eurozone growth worries
- Dollar struggling to shake off rate hike concerns
UK facing its greatest upheaval in a generation
Even the time since the original vote was deferred has not brought even a glimmer of hope for a solution to the crisis which is becoming ever more likely to engulf the country.
Following Friday’s price action which saw the pound rally through what had been considered significant resistance, it is clear that the market is more susceptible to positive rumour than the almost certain defeat for Mrs. May’s plans.
The pound rallied versus the dollar to a high of 1.2865 on Friday, its highest level since late November, as a rumour that Brexit was to be delayed beyond March 29th due to a technical issue where not all the requirements of the UK’s departure were likely to be in place swept through the market.
This was quickly denied but those traders who liquidated short positions illustrated perfectly the nervousness of the market and the enormity of the issues facing the UK should it depart the EU with no deal on the future relationship. It seems that many simply cannot countenance a no deal Brexit.
Today’s newspapers are full of rumour and counter-rumour of secret deals and plots swirling around Westminster and it is probable that unless there is a major announcement, the pound will remain confined to a narrow range as it awaits tomorrows vote.
Data confirms EU’s slide toward recession
The market has grown used to major shocks like the 2008 financial crisis dragging economies into economic contraction and that makes the current situation that much more of a concern.
Monetary policy has been at its most accommodative for many years but in contrast to the U.S., the eurozone is struggling to find any growth or optimism in future development. The ECB is tethered to its inability to affect fiscal policy as each member of the Eurozone has its own tax regime. It would be impossible for an agreement to be reached on a Eurozone-wide cut in taxation to provide the stimulus that was seen in the U.S. a year ago.
Industrial output in Italy fell 2.6% year on year in November after a rise of 1% in October as activity in the entire region slowed leading to a fall in demand.
As the eurozone enters a crucial period as the run-up to elections in May begins there is a growing feeling that it could be “every man for himself” as the nationalist feeling grows and any further move towards greater Federalization is placed on the “back burner”.
The single currency fell versus the dollar to 1.1457 on Friday, closing just five pips from the low. It continues to gyrate around the significant 1.1520 level and appears unable to gain a solid foothold above that level.
Dollar still taking Fed. actions on board
Traders are still coming to terms with the Fed’s intentions this year as it has heard FOMC Chairman Jerome Powell is perceived to have turned a little dovish.
In fairness, Powell was never particularly hawkish in his comments last year despite President Trump’s tirade about the sanity of the rate adjustments that took place. In his first few months in charge, it appeared that Powell believed actions spoke louder than words and he was prepared to be guided by his colleagues as he eased himself into the role.
It is now safe to assume that the Chairman’s comments in the past few months have been his way of asserting himself in the role and the Fed could now be considered a little more reactive to data than preemptive as it was through most of last year.
The dollar index seems to have settled into a more comfortable range, trading between 95.00 and 97.00.
The more significant driver of the dollar than the domestic economy at present would seem to be global trade.
Overnight China released trade data with its exports falling by 4.4% and imports by 7.6%. This primarily affected the AUD since Australia is China’s largest trading partner and supplier of a large volume of raw materials. The dollar index also reacted negatively, capping a rise which had reached 95.76 on Friday.
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.”