15 November 2019: Sterling sees positivity in Conservative victory in election

15 November 2019: Sterling sees positivity in Conservative victory in election

Sterling sees positivity in Conservative victory in election

15th November: Highlights

  • Late rally sees Sterling at six month high
  • Powell provides a dose of realism

Brexit conclusion or an end to Austerity?

The upcoming election in the UK was brought about by the inability of Parliament to agree a strategy for the country on how to leave the EU following the 2016 referendum.

It matters little now that being a non-partisan issue, that Parliament should never have been the body tasked with negotiating the Withdrawal agreement. It should have been left to a commission of Brexit favouring businessmen, backed by civil servants, who reported back to Parliament who would then have voted to accept what was agreed.

That is the Utopian vision of Brexit, but it would have saved at least one Political career already and maybe one or two more in the coming months. That Parliament felt the need to be the body that negotiated the UK’s departure from the EU has both prolonged the process and allowed the country to continue to debate an issue that was voted on more than forty months ago and is still not concluded.

Boris Johnson has been handed two gifts already in the run up to the vote. The first was the main opposition Party admitting that it is so split over Brexit that it will offer a referendum on what would clearly be a “watered down” Brexit should it win the election and if that didn’t gain the support of the public, then a second referendum would be held. Johnson’s second gift was to be told by the Leader of the Brexit Party that no seat won by the Conservatives in 2017 would be contested by his Party.

Those two presents may just have provided the momentum that was drifting away as the election go under way.

Yesterday, the only data released was for housing prices which fell by 5% in October, which was a far greater fall than the market had expected. Next week is a particularly light week for data so the focus will be directly upon the reaction to the election debates, the first of which takes place on Tuesday evening.

The pound remains reasonably well supported with traders gearing up for a buying spree should the polls at the weekend really show a strong favouritism for the Government.

Yesterday it traded up to a high of 1.2889, closing at 1.2879

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Trump’s call for stimulus ignored as inflation rallies

It is fair to say that Jerome Powell wouldn’t have been the market’s choice as Chairman of the Federal Reserve. His appointment, in February last year was more an example of President Trump’s attitude to his own job than testimony to Powell’s qualities.

Powell was a contrarian appointment. Never before in the history of the Central Bank had anyone been appointed to the position who didn’t come from a financial background. It is obvious that Trump wanted a Fed. Chairman who, he believed, could be “controlled, a man from outside the “inner circle” of the big firms. With hindsight, that was an error from the President since Powell’s credentials and his legal background gives him a certain gravitas that leads him to “be his own man”.

Powell’s almost two years at the Fed have not been easy. He took time to come to terms with “playing the game”. He didn’t quite follow the rules of advance guidance believing that straight talking and providing details of his plans was the correct path.

That didn’t prove to be successful and since he is no Bernanke and certainly no Greenspan, the relationship was difficult and took time to settle.

Since the most recent FOMC meeting, traders, analysts and commentators appear to have opened their minds to what Powell is trying to achieve at the Fed. and began to appreciate that he believes his first task is to ensure the independence of the Bank and resist any outside influence over monetary policy.

President Trump is in favour of far looser monetary policy but with inflation on the increase Powell is not going to be “bullied” into a “rush for growth” simply to give the President a solid economic platform for his 2020 campaign.

This week the Fed. Chairman has been testifying before the Senate’s joint Economic Committee a group that in the past could have been said to have more experience of the economy than Powell. However, since he has grown into the job, accepted his limitations, he is now considered one of them.

His evidence to the committee, was logical and well received. He acknowledged the risks to the economy but was also positive in his views of his own actions. His “performance” was generally well received.

The dollar remains in a narrow range driven by day-to-day data and trade related matters. Yesterday, it rose to a high of 98.42, closing at 98.33

Inaction cannot become policy

The ECB appears to be in an eternal wait for the economy to turn around of its own volition. That cannot be the only policy available to the Central Bank as it wrestles with the politically sensitive issue of greater integration.

As the EU and Eurozone have matured and developed a political basis for growth and achievement of its “mission statement”, something has been lacking from the financial makeup of the region.

That “missing link” is the relationship between the Central Bank and the Administration.

As Messrs Tusk and Juncker depart to be replaced by Charles Michel and Ursula von der Leyen, it is hoped that a more effective relationship will be built with the new ECB President, Christine Lagarde. It is expected that Lagarde’s approach, less technocrat, more politician, will drive the relationship between Frankfurt and Brussels to a more cooperative relationship.

The term of Mario Draghi was characterized by several bouts of “firefighting” but during the less turbulent periods, the ECB appeared content in its belief that the economy was best served by being left to its own devices without too much interference. This ultimately proved to be the wrong assumption since during times of “feast” the Central Bank failed to prepare for “famine”. The best time to prepare is when times are good but virtually no work was done to prepare for fiscal union and now time is running out and it is possible that errors will be made given the haste required.

It remains to be seen how Lagarde will fare as ECB President. Her first Council meeting is imminent and how she appears to journalists at her first press conference will go a long way toward cementing her relationships.

Yesterday, the single currency remained in a narrow range managing to close above the crucial 1.0980 support

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.”