Becalmed Sterling awaits Brexit outcomes
October 16th: Highlights
- Traders remain nimble as big swings possible
- Risk aversion drives the dollar lower
- Italy talks tough as budget delivered to Brussels
What else did we expect?
When this issue was first raised as one of the four pre-conditions for Brexit issued by Brussels it was not only something that had never been considered by the voters but was also thought to be a trivial matter. Looking back to the 2017 election when Mrs. May badly underestimated her Party’s position, no one considered the role the DUP would have in both the future of the Government and the Brexit process.
As the EU Brexit Summit looms large, forty-eight hours remain for the wording of both the border agreement and the backstop to be decided. While that seems an impossible task given what has gone before, the most hopeful noises are now coming from London following last week’s optimistic messages from Messrs Barnier and Juncker.
However, the ball now seems to be firmly in Brussels court as they appear to be the more intransigent party over this issue. Whether they will continue to strive to find an acceptable form of words or have decided to defer to the issue until after the summit is what is keeping the pound in a narrow range with no trend or direction.
Yesterday the pound traded in a 1.3182/1.3085 range versus the dollar with the majority of that seen before London even opened.
It is impossible to predict with any degree of certainty whether 1.3000 or 1.3300 will be seen first but whatever the direction for the pound, it is likely to be volatile.
Dollar lower as global tensions rise
Weak economic data which showed retail sales in the U.S. fell by 0.1% in September against a market expectation of a rise of 0.3% and a cooling of long-term yields also had the effect of pushing the dollar lower.
It appears that, for now, the market is ignoring the midterm elections that have the potential to drive several underlying issues long into 2019. These elections are generally considered to be a vote of confidence (or otherwise) in the President’s “first-half performance” and while these are no different, the potential for a significant shift in the country’s orientation is possible.
With two years of fairly plain sailing for Mr. Trump with both houses of Congress controlled by the Republicans, there is real potential for change despite his assertions that his continued popularity will win the day. That is sure to be a story for the next few weeks.
Tomorrow’s release of the minutes of the most recent FOMC meeting are more likely to have a short-term effect as Chairman Powell reinforces his view on short-term rates and we can gauge the level of support he has from his colleagues on the committee.
Yesterday, the dollar index fell to a low of 94.95. This level appears to be lending support. It closed a little higher at 95.07 and has climbed marginally overnight.
Rome delivers budget to Brussels and continues to talk tough
Next year sees EU Parliamentary elections in May and while campaigning has hardly started in earnest, it is likely that there will be several candidates in most countries that are looking to reform from within and possibly devolve certain powers back to member’s own legislatures.
For now, Italy is enough of a thorn in Brussels side with the budget that was delivered yesterday continuing to create a deficit of 2.4% with the promise of only a minor improvement in the next three years.
Rome intends to be tough with Brussels over other issues too.
Deputy Prime Minister Matteo Salvini, in a speech at the weekend, commented “Everyone is taking shots at us — not a single day passes without news bulletins, the European Commission, the Bank of Italy, the state accountant or the statistics agency saying we can’t do this. Your votes give me strength to go to Brussels and say it’s the Italians that decide, not them.”
So far, the new Government has confirmed its commitment to its election promises and now is the time to start delivering. When that happens, Brussels will have to sit up and take notice otherwise this really could be the “thin end of the wedge.”
The single currency remains under pressure but benefitted from the weakness of the dollar, rising to a high of 1.1607 before closing at 1.1579.
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.”