14 May 2019: Brexit fatigue remains as talks continue

Brexit fatigue remains as talks continue

May 14th: Highlights

  • Opposition MPs will reject a deal without a referendum
  • Euro facing political as well as economic issues
  • Dollar a victim of its own success

Cross-Party talks continue with no agreement in sight

Trying to find a Brexit compromise that will satisfy a majority of MPs remains as elusive as a deal Between London and Brussels was. In politics, the idea of making a gesture to resolve an issue without receiving something in return is anathema, so with around 150 Opposition MPs refusing to accept a deal that doesn’t include a second referendum the present stalemate is set to continue.

The opposition leader has said that the talks cannot be endless, but the public remains in the dark about whether a deal is possible despite snippets of leaked information and the odd critical comment about the other side’s intransigence.

Today’s employment data will provide traders with a welcome diversion although the UK data doesn’t carry the same significance as its U.S. equivalent. It is expected that the rate of wage inflation will fall slightly to 3.3% from 3.4% in March. The headline claimant count is largely irrelevant as a factor for the currency since it is “infected” with spurious data that is simply a “crowd pleaser”.

The pound is set in a very steady range that will take a significant event to break. Next week’s elections are one possible catalyst, but it is hard to predict what degree of humiliation the Government will suffer and how that will translate into the outlook for the currency. It is almost impossible to extrapolate a prediction for a General Election from what is likely to be a significant protest vote although many will try.

The two-Party Politics that have existed since the Labour Party became a force in the UK are under threat and it is the entire system that needs a complete overhaul.

Sterling retreated below 1.3000 versus the dollar reaching a low of 1.2941. Its recovery was shallow, and it had only reached 1.2958 by the close.

Considering your next transfer? Log in to compare live quotes today.

Greenback in a state of confusion

It is hard to draw any conclusion from the current set of drivers that are “in play” for the dollar.

The long drawn out process labelled “a negotiation” with China over an equitable trading relationship is a double-edged sword for the U.S. On the one hand, any threat to U.S. exports should see the dollar fall while on the other, the clear tension created and the elusive nature of a deal heightens risk aversion and leads to safe-haven buying.

Finding a balance for the currency that all parts of the economy can work with is a tough ask for the U.S. Treasury which is nominally responsible for the currency while the Fed deals with providing the conditions for the economy to flourish. Under this administration, the edges of that differential have become blurred and that is viewed by analysts as sensible given the relationship between monetary policy and the currency.

The dollar has generally been left to find its own level which is an entirely sensible practice since the stature of the currency is close to sacrosanct. As is seen from past interventions by the authorities they are most commonly used to assist other nations, particularly Japan which has a close to one-dimensional monetary policy.

Given the makeup of the dollar index (an outmoded method of using the currency of six trading partners to value the dollar), it is living in something of a fool’s paradise. The fact that 57.6% of the basket is made up by the euro provides an unnecessary level of volatility, while the presence of the Swiss Franc (the importance of which has diminished considerably) and Swedish Kroner adds little to the overall impression.

Clearly, there should be a place for the Chinese Yuan but the fact that its value is so clearly and obviously centrally managed would place the U.S. at a huge disadvantage.

For now, traders and analysts alike are prepared to believe that the U.S. economy continues to grow but it is hard to say if that is “on trend” given the backdrop of global economic activity and the unique issues facing the UK and Eurozone.

Yesterday, the dollar index closed within eight pips of its open at 97.38 having reached a low of 97.03 earlier in the day.

Patience is a virtue for euro bulls

For anyone to be bullish for the prospects for the single currency and the Eurozone economy they will need to be patient and able to play the “long game”. It is going to be some considerable time before the economy is operating anywhere close to capacity as the more structural issues continue to hold it back.

Clearly meant for a domestic audience but resonating across the region are the words of former Polish Prime Minister, Jaroslaw Kaczynski, who warned about joining the euro highlighting that it is only two or three nations that have benefitted from membership. He believes that economies like Greece were actually damaged by Eurozone membership during the financial crisis and that “adjustments” are needed before such an arrangement can work for all.

Germany is one considered to be a beneficiary in Kaczynski’s view but given the current parlous state of their economy, it is doubtful that Germans see it that way. Along with other nations who joined the EU in 2004, Poland is committed to joining the single currency. However, the official line is that they won’t join until Polish wages are on a par with the EU average and that could still be decades away.

The ECB remains committed to the view that the currency will “take care of itself” while the economy continues to adjust to current monetary policy and as long as inflation is well controlled, its “benign neglect” will continue. Yesterday it again mirrored the dollar, closing at 1.1220, close to its low of 1.1215. It had opened at 1.1234 and climbed to 1.1264 earlier in the day.

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.”