17 September 2019: Does Johnson have one more trick

Does Johnson have one more trick?

September 17th: Highlights

  • Sterling bulls still concerned about no-deal
  • Add the oil price to dollar drivers
  • Euro sentiment remains weak as Brussels awaits Brexit decision

Confident Prime Minister still insisting on Brexit by 31 Oct

Following last week’s rumours of a possible breakthrough in Brexit negotiations which would have meant that, in effect, Northern Ireland remains within the single market following Brexit, this week, Brussels continues, in its words, to await proposals from the London.

Boris Johnson travelled to Luxembourg yesterday and received an extremely hostile reception from an assembled pro-EU crowd. His stance over Brexit was severely publicly criticized by the Luxembourger Prime Minister who laid the blame for the chaos firmly at Johnson’s door.

In a TV interview which followed a meeting with Jean-Claude Juncker, Johnson remained extremely confident that the UK will leave the EU on 31st October with or without a deal. Should it be with a deal, it seems that Johnson is pinning his entire political career on getting a deal agreed at the EU summit in mid-October.

It is his confidence that failing being able to agree on a deal, the UK will still leave without a deal, despite Parliament “outlawing” such a move, that is spooking markets.

While traders aren’t thrilled economically at the UK’s departure from the EU, a no-deal Brexit is viewed as infinitely worse.

The Bank of England MPC will meet later this week and although the Central Bank has been virtually sidelined during the Brexit process, Governor Carney faces some tough decisions before he leaves office at the end of the year. With wage inflation at 4% and CPI hovering around the Government’s 2% target, he will have very little “wiggle room” should Brexit “head south” and both the pound and economy fall significantly.

Yesterday, the pound fell to a low of 1.2399, as fresh shorts were established on no-deal fears, although it recovered to close at 1.2427, lower on the day as overall optimism over Brexit faded.

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Dollar buffeted by oil price as Market awaits FOMC decision

The attacks which took place on Sunday night on Saudi Arabian oil installations has added a further complication to those trying to plot a path for the dollar.

While the overriding factor is the direction of short-term interest rates the dollar’s global significance cannot be overestimated. The U.S. maintains a strategic stockpile of oil for use in such circumstances as have been seen over the past twenty-four hours. President Trump authorised the use of this emergency crude stockpile to stabilize oil prices which at their peak had risen by 20%.

Little has happened to provide any more clarity about the intentions of the FOMC which meets later today with the result of its deliberations being announced tomorrow.

The balance of probabilities has moved slightly in favour of a further cut since oil production in Saudi Arabia, the world’s largest producer has been severely damaged and any further escalation of tensions in the region is sure to influence the global economy.

The markets’ expectations of an imminent breakthrough in trade talks have also taken a hit as a date for the arrival of a Chinese delegation in Washington is yet to be confirmed despite recent talk of progress between the two sides.

The dollar index rallied to a high of 98.71, closing at 98.64 due in no small part to the continued weakness of the single currency. (see below).

ECB passes the buck (or Euro) as the economy remains weak

The reverence that the market has for the power of the Central Banks has been slowly eroded over the past ten years. The Fed is often second-guessed, the BoE is totally sidelined and the ECB has been unmasked as a toothless bureaucracy that has nothing to offer to end the Eurozone’s slide towards recession.

Despite cutting growth and inflation forecasts for the next three years at its meeting last week, a revelation that shocked no one, the ECB still feels unable to face the inevitable, and forecast contraction.

While the Luxembourger Prime Minister berates the UK for its handling of Brexit, he should maybe cast an eye towards Paris or Berlin where the real pain will be felt. There is little doubt that there is pressure building now on Angela Merkel and Emmanuel Macron to avoid no-deal as it would play havoc with the already brittle economies of France and Germany.

Both may technically already be in recession and any form of tariffs placed upon what will soon become exports of motor vehicles and components post-Brexit could be catastrophic.

Despite Johnson meeting with Jean-Claude Juncker yesterday, it seems that behind the scenes most of the Brexit legwork is being done “Government to Government” with Chief Negotiator Michel Barnier somewhat sidelined.

The entire Brexit scenario may prove a salutary lesson to Brussels or Strasbourg about the ability to make decisions when faced with multiple levels of bureaucracy all of which must be paid for from a budget which is about to be significantly reduced.

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.”