15 January 2020: Brexit becoming “Old News”

Brexit becoming “Old News”

15th January: Highlights

  • Sterling struggling with rate cut fears
  • Phase One signing imminent
  • ECB in alternative reality

Concerns over economy drive by BoE rate cuts comments

As Sterling finally heaves Brexit off its back, the reality of a slowing economy is laid bare for investors. A growing trend started last week by Governor Mark Carney has been joined by other members of the MPC. The renewed focus on the economy has commentators beginning to consider a rate cut as early as the next MPC meeting that will be held on January 30th, the day before the “phoney” departure from the EU takes place.

UK Prime Minister Boris Johnson is insisting that the bell on Big Ben should ring out on 31st at 11.00pm to symbolize the UK’s independence from Brussels. Unfortunately, until December it will be just about the only thing that happens to signify anything different. The UK will still be governed by EU rules and its Supreme Court, the budget contribution will continue to happen, and the four freedoms will remain.

Sterling managed to recover a little poise as the money markets prediction for a rate cut this month fell from 50% on Monday to 43% yesterday.

It is a little out of character for MPC members to discuss an issue then immediately act. The Bank has a similar outlook to the Fed in that it will not be phased by a single piece of data or a single month’s releases preferring to study trends in forward looking indices.

The pound has been threatening the 1.30 level since the election euphoria died down despite Johnson making “all the right noises” He has managed to get the Northern Ireland Assembly back to work and told the Scottish Nationalists that they must abide by the Edinburgh Agreement and accept the 2014 referendum decision which was supposed to be a once in a generation decision, not something that is continually voted upon until the “right” result is achieved.

Yesterday, the pound corrected part of its recent fall, making a high of 1.3034. It still looks a little vulnerable and should data continue to point south, speculation about BoE action will start again. The pound closed at 1.3021.

There is a whole slew of data due for release later this morning which may provide the MPC with a little more “meat on the bones” of the economic situation.

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Following the “Middle Eastern Masterstroke”, market awaits Phase one

Despite it being a little early to declare that Iran has been cowed, President Trump is “feeling good” about the military action he authorised in Iran. Analysts still believe that it is still too early to declare that the issue is over. Speculation remains that Iran may still have more to say in revenge for the assassination of its most senior military strategist.

However, today, the market’s attention turns to the unveiling of phase one of the trade agreement between China and the U.S. There has been a series of snippets released, mostly by Washington, while Beijing has remained tight lipped.

If the most significant concession in the entire agreement is that China’s name is removed from the U.S. Treasury’s list of countries accused of being “currency manipulator” then it can be considered a rousing victory for Beijing. There have been very few details of economic changes leaked so far. It does appear that in exchange for allowing the import of a relatively insignificant additional amount of additional agricultural equipment, China has managed to play down fears over its technological advances and gain access to other important markets.

Should it become apparent that the U.S. has weakened its tough stance, using tariffs to “punish” China, then the outlook for phase two will not be quite so bright and the dollar will suffer accordingly.

The greenback has been difficult to track since the turn of the year. Despite the economy faring considerably better that most of its G7 partners, the employment report took the “wind out of the sails” of those seeing the next move in rates being an increase and led more to believe the Fed’s “steady as she goes” metaphor.

Yesterday, the dollar was unchanged on the day, closing at 97.39. It had traded in a range between 97.32 and 97.58.

Improvement in the economy completely vindicates ECB?

Yves Mersch, a member of the Executive board of the European Central Bank yesterday joined the growing throng of senior figures “talking up” the prospects for the Eurozone economy.

In what can be considered about as radical a statement as can be expected from Brussels or Frankfurt, Mersch commented that” any improvement in the economy completely vindicates the actions of the ECB!” Bold? Possibly, Brave? Certainly. Foolhardy? Time will tell..

If Mersch is to avoid finding himself with egg on his face the turnaround in activity in the region is going to have to at least match and possibly exceed confidence indexes in the coming week/ months.

While Merch did remain cautious over the “side-effects” of ECB policy, he also mentioned that steady inflation is “providing good signs of stabilization”. I’m sure Yves will forgive me mentioning this but didn’t Mario Draghi promise that the economy would only start to improve once inflation started rising. Did he forget or is the Central Bank subtly changing its policy on prices?

The financial markets appear to want to wait for a more concrete improvement before getting too excited. Yesterday, the euro fell to a low of 1.1104, before recovering to close at 1.1128.

November industrial production is released later this morning. It is expected to have improved from a fall of 0.5% previously to a rise of 0.3%

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.”