May wins Confidence vote; Sterling unmoved
January 17th: Highlights
- FX Markets awaits clarity
- Draghi expresses Eurozone economy concerns
- Dollar retains gains, but further upside potential limited
Market clings to article 50 extension hopes
The remaining Brexit options appear limited. With a second referendum being ruled out (for now) and a General Election now off the table, it will be left to Mrs. May to salvage something from the wreckage. In the immediate aftermath of the vote, she called upon the leaders of each of the opposition Parties to meet with her individually to try to find some consensus. That invite was immediately used by the leader of the largest opposition Party to demand that no deal be “taken off the table” before any meeting can take place. No deal is difficult, if not impossible, for Mrs. May to guarantee since it becomes the default position should further negotiations be refused by Brussels and no agreement be reached in Westminster.
There have been several calls to exercise Article Fifty, the clause in the EU’s Lisbon Treaty which deals with withdrawal, to be extended. While this is a practical way to allow time for further talks and/or negotiation, it is fraught with risks. Brussels has said it will agree to an extension for further discussion in the UK to find consensus, but not to reopen negotiations.
The EU elections take place in May and the UK clearly does not want to be involved and an extension could also see any transition period overrun into the start of the next round of EU budget discussions which, were the UK to still technically be a member of the EU, it would be expected to agree its contribution.
It is the possibility of an extension to the exercise of Article Fifty that is supporting the pound. Following the vote last evening and indeed for most of yesterday, it traded in a very narrow range around 1.2860 seeing selling pressure on approach to 1.2900 and attracting buyers around 1.2820.
FX traders are being unusually reticent in taking a view on the eventual outcome of Brexit with so many possibilities on the table. This reflects perfectly the level of uncertainty that exists currently and probably will for many weeks, if not months, to come.
Draghi sees weakness, not a recession
He believes that while the economy will remain weak for an extended period there will still be positive growth, albeit weak and patchy, seen throughout the region.
Recent data releases from individual members of the Eurozone have pointed towards a coming recession but Draghi believes that despite lower and lower growth rates, consumption, export growth and employment are all reasonably healthy.
He continued the dovish tone that the market has now grown used to as he confirmed that interest rates would stay accommodative for “some time to come” and that despite the end of fresh purchases under the Asset Purchase Scheme, all maturing debt would be reinvested to retain a certain amount of stimulus.
The single currency reacted poorly to these comments, with traders doubting that the region can avoid a recession as growth is slipping away and the ECB has very little “in its locker” to reverse the trend.
It fell to 1.1377 and closed at 1.1392 versus the dollar yesterday and has remained weak overnight. Its continued drift lower can be tolerated by the Central Bank as it supports export activity but should the pace quicken there will be concerns raised about its effect on inflation.
Dollar pauses for breath as the shutdown continues
With no end to the dispute in sight as the Democrat-led Congress digs its heels in and the President continues to play upon his supposedly high approval rating, it is hard to see how this can end well for the economy.
The dollar has been recovering from its recent correction as the market considers by how much if, at all, the Fed will hike short term interest rates in 2019 but this continued dispute may start to weigh on the dollar index.
This, in turn, may give some support to the single currency despite the continued slowdown in economic activity mentioned above. It illustrates perfectly the interconnectivity of the market yet traders will probably become more and more interested in how the dispute can be solved and, just as importantly, by how much will the relationship between the President and Congress be soured as the interminably long run-up to the November 2020 Presidential election begins.
The dollar index rallied a little yesterday but is still hemmed in by selling interest from those concerned about the continued shutdown. It reached a high of 96.18 and closed at 96.11. The longer resistance between 96.20 and 96.40 remains unbroken, the tougher it will become for the dollar to eventually make any further progress without a deeper correction.
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.”