MPs vote for May to request Brexit extension
March 15th: Highlights
- EU approval not guaranteed
- A U.S./China trade deal is still weeks away
- Eurozone needs greater fiscal unity to fight a downturn
Sterling takes a breath
The original “hard Brexit bad, soft Brexit good” (in Sterling terms) mantra has been replaced by “no deal bad, delay good” as the options remaining to the Government dwindled.
Last evening the House of Commons continued its recent practice of confirming what it doesn’t want. But it is now crunch time as Mrs May returns to Brussels with a request, sanctioned by Parliament, for an extension to the execution of Article Fifty.
This was always going to be a tumultuous week. The second attempt to pass the Withdrawal Agreement with seemingly only cosmetic changes was unceremoniously defeated, MPs decided that they do not want to leave without a deal in any circumstances and finally, they decided they wish to extend the period of negotiation despite Brussels confirming, in no uncertain terms, that the time for negotiation is long gone.
Sterling has benefitted from the ongoing uncertainty in a counter-intuitive manner. It has reached a 22-month high versus the single currency this week and following an initial break higher versus the dollar, it has remained in its well-known recent range.
The burning question is where does Brexit head now? It seems Mrs May will try a third time to pass her legislation since, despite her intention of running down the clock to “scare” MPs into passing the current deal, MPs have found they were powerless to stop it given their own inability to come up with a viable alternative.
Brussels reaction to May’s request will most likely include a demand for the reasons for a delay and a confirmation of how the time will be spent. They will also want Mrs May to have Parliamentary approval, in advance, for any new terms she takes to them in the future.
Yesterday, the pound traded between 1.3341 and 1.3207 versus the dollar, closing at 1.3241.
Trade talks progressing, but slowly
Comments made yesterday show that it will be early in Q2 before the talks produce an agreement and even then, it is unlikely to be earth-shattering. That is because both sides understand the fact that they both need to be able to use trade as a weapon since there is one thing they do agree on and that is they both need each other.
The U.S. needs China to buy its ever-burgeoning Government debt pile while China will only want to lend money to the U.S. to buy Chinese goods. This vicious circle is growing all the time and is something that will now be impossible to reverse and with China’s global influence likely to continue to grow, America is becoming more and more hamstrung.
President Trump is unlikely to meet his Chinese counterpart as soon as was expected as there will be no new trade agreement to sign in the very near future. It was expected that the two would meet this month but that will be delayed by up to a month.
Global trade is the collateral damage from sabre rattling from the two Superpowers. China is struggling to maintain its growth rate and its appetite for raw materials has a direct effect on the economy of several nations not least of all Australia where economic activity is closely tied to China.
U.S. data released yesterday was in keeping with recent releases. Unemployment claims were a little higher. This follows fewer jobs being created in February while new home sales fell more sharply than expected.
Yesterday, the dollar index broke its recent run of declines rallying to 96.82 before closing at 96.76.
ECB fighting downturn with a severe handicap
In order to manage the economy, a Central Bank needs to work hand in glove with its Government to manage both Fiscal and Monetary policy. While monetary policy is a manner of managing the economy once a fiscal policy has been agreed, the Eurozone is in the unique position of having 19 separate fiscal policies and this means that monetary policy works in isolation.
When President Trump cut taxes in the U.S. last year, the effect on the economy was immediate and the result could be seen in the Fed’s reaction by tightening monetary policy. That was a prime example of the action and reaction of fiscal versus monetary policy. Of course, it is fairly obvious that the Central Bank didn’t necessarily agree with the Administration’s actions but it had the tools to react.
With the ECB not having a solid fiscal platform on which to operate it effectively has one hand tied behind its back when fighting the current downturn.
This leads to the “eternal question” of the Eurozone. Does it “stick or twist?” Does it move towards closer integration with a unified taxation system which would provide the ECB with the fiscal platform it requires or will nations like Italy baulk at its taxes being determined in Brussels?
That remains to be seen but, in the meantime, the ECB has little choice but to try to weather the storm.
The single currency reacted to a strong dollar yesterday by correcting to a low of 1.1294, closing at 1.1303.
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.”