Sterling at one month low as PM loses vote
February 15th: Highlights
- May loses the support of Parliament for continued negotiation
- Weak retail sales data hits the dollar
- Germany narrowly avoids “official” recession
May facing a tough time in Brussels after Commons vote
As Eurosceptic members of her own party abstained, she lost a mostly symbolic vote which would in effect have taken a no deal scenario off the table. Their belief that not having the “option” of no deal would weaken the UK’s position in Brussels. MPs have shown that Parliament will be unable to show the EU what it will agree to, as it yet again confirmed what is unacceptable.
As the UK’s departure from the EU is imminent, a vote to extend the execution of Article Fifty was also defeated. While Mrs. May reiterated that it is not her intention to “wind down the clock” forcing Parliament into a “May deal or no deal” situation, she is clearly moving towards such an outcome.
The pound fell versus both the dollar and euro during the day as it became clear that it was likely that the Government would lose the vote. In the immediate aftermath, it managed to stabilize around 1.2800 versus the dollar as essentially nothing had changed. It had reached a low of 1.2773 earlier in the day and closed at 1.2792. Versus the euro it also fell, reaching a low of 1.1311, closing at 1.1328.
Dollar weakens as retail sales data disappoints
Following the Fed’s recent confirmation that it will pause its rate hike cycle while the economy “catches up” with recent hikes and other measures like tax cuts and infrastructure investment, the picture of activity has been somewhat mixed.
Producer price data which was also released yesterday was marginally stronger than market expectation which, following the release of inflation data on Tuesday, confirmed price pressures are beginning to build.
The decision to pause the rate hike cycle is starting to look like the right move by the Fed as domestic influences remain unclear. Employment remains strong, although the market will expect to see a far smaller revision to the January non-farm data than was seen to the December figure, which was revised down by close to 30%.
Next week’s release of durable goods orders and various activity indexes will go some way to giving a clearer picture of the economy although the Fed will want to see the trend develop over several reports before considering any change to its new, data-driven, monetary policy.
No relief as Germany avoids a technical recession
The German economy neither grew nor contracted in the fourth quarter of 2018, as GDP data showed the economy was flat. This means that having contracted by 0.2% in Q3, the economy managed to avoid fulfilling the generally accepted requirement of two consecutive quarters of contraction to be confirmed as in recession.
The official data and definition notwithstanding, it is clear that the German economy has followed Italy and is about to be joined by Spain and France in recession.
Despite the brave words of the ECB over having sufficient tools to fight falling growth, alarm bells must be sounding in Frankfurt as the return of the Asset Purchase Scheme becomes almost certain.
Questions are going to be asked about the reasoning behind the withdrawal of accommodation when the economy was faltering and contraction had been seen in several economies in Q3.
The incoming ECB president, who will replace Mario Draghi officially in November, is going to be faced with a growing crisis, relating to both short term action to stimulate growth and the longer-term credibility of both the Central Bank and the Eurozone.
A weaker currency will go some way to providing a certain amount of stimulus to export activity but it may need another 5% fall to be sufficiently effective.
Yesterday, the single currency fell to a low of 1.1249 before recovering to close a little higher on the day at 1.1293 as the dollar faltered following weaker than expected data.
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.”