FX Market prepared to await Brexit outcome

The pound had another day of significant gyrations yesterday as traders seemed unable to decide just how serious the political ramifications of the Brexit agreement will be for the economy. Another General Election is now a real possibility as Mrs. May faces both the loss of support from the DUP, who have been propping up her minority Government and a possible vote of no confidence.

The agreement that was delivered to the Cabinet yesterday is rumoured to fall well short of the mandate given to the Government by the referendum result. It is cold comfort to the market that the Cabinet has “collectively approved” its contents since that expression infers that there were some serious dissenters who have for now agreed to the concept shared responsibility. However, it is not difficult to remember a similar scenario at Chequers in July, where the plans were approved only for Davis and Johnson to resign within 48 hours.

The pound ranged between 1.3073 and 1.2881 yesterday as every comment seemed to warrant a reaction. That is unlikely to change as the furor of Brexiteers and the condemnation of the Opposition remain close to boiling point.

Inflation data was released yesterday with headline CPI remaining at 2.4%. This was driven by the relatively consistent levels for the pound around 1.3000 versus the dollar and its rally versus the single currency. Today’s retail sales data won’t have a significant effect on the pound although the data is being stored away by analysts to be considered later as part of the overall outlook for the economy post-Brexit.

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When Germany sneezes…

There is a timeworn expression that when America sneezes the world catches a cold. The modern-day version of that expression could be easily related to Germany and its significant influence over the rest of the EU/Eurozone.

Germany released Q3 GDP data yesterday and while it was a “good day for bad news” with so much going on around Brexit and the Italian Budget, it won’t have escaped anyone’s notice that the economy of the largest contributor to the EU shrank in the period between July and September. The German economy contracted by 0.2% in Q3. The market had been expecting a 0.1% slowdown. It was, therefore, the fact that the contraction was worse than market expectations rather than the slowdown itself that took the wind out of the euro’s sails.

Mario Draghi, the ECB President, will have taken note and be eagerly awaiting the region-wide data before concerning himself of any possible action by the Central Bank. While he has always said that only data for the entire Eurozone interest him and country by country data is more of a distraction, he cannot fail to be concerned that despite the accommodative monetary policy, even the largest economy is failing to grow.

There was further rhetorical bluster from Rome over the budget crisis yesterday but little else as Brussels considers its next move. The ball is firmly in the EU Commission’s court since Rome seemingly stands firm over its plans for 2019

The euro rallied to 1.1347 yesterday, closing at 1.1322 as the dollar drifted in a well-trodden range.

Reactive dollar lacking fresh drivers

There is no doubt that there is an air of positivity surrounding the dollar as monetary policy is going to provide support for the next six months or so as the UK continues to agonize over Brexit and the Eurozone faces a slowdown and monetary policy remains accommodative.

However, for the dollar to continue its upward path the market will need further stimulus and it is hard to see where that impetus will come from. A rate hike at the mid-December FOMC meeting is now just about 100% priced in and as such it may be a case of “sell the fact” when that happens.

For the rest of 2018, the greenback is likely to be in reactive mode with any possible gyration in equity prices the only significant imponderable that could possibly to spring a surprise.

The dollar index closed within thirteen points of its opening yesterday despite its range being dictated by the gyrations of its constituent parts.