18 February 2020: Johnson looking for nothing special

Johnson looking for nothing special

18th February: Highlights

  • Brexit comments driving Sterling
  • Trump and data disagree over strongest ever economy
  • Ecofin discusses German budget surplus and how to encourage growth

UK and EU could rip each other apart in talks,

After a brief lull when the two groups seemingly recharged their batteries, both the UK and EU appear ready to renew hostilities over the agreement of a Post-Brexit trade deal.

UK Prime Minister Boris Johnson having apparently got his ducks in order, at home by reshuffling his Cabinet and ruffling the feathers of his Chancellor of the Exchequer so much that he resigned, is ready to battle Brussels on what the Post-Brexit landscape will look like.

Johnson is well aware that in general terms he is at a disadvantage in the talks given the size of the respective markets, despite the UK having a much larger prize to win in opening up the EU market to British goods and, more importantly, services.

However, the timing of Brexit has arrived at a most inopportune time for Brussels, given the parlous state of its economy.

The UK’s Chief Brexit Negotiator commented that the UK must have laws that suit us as he ruled out alignment with Brussels, although did agree that the EU court would have a role in settling trade disputes.

France has warned that Britain faces a bruising battle during the talks. The French are particularly concerned about fishing rights and agricultural subsidies.

Employment data will be released later this morning with the rate likely to be unchanged at 3.8%.

The pound remains well supported above 1.30 versus the dollar. Yesterday, it reached a high of 1.3054 but drifted back to close at 1.3002. Concerns over the start of the trade talks may cap gains for now but overall the economy remains on a shallow upwards path.

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Trump’s rhetoric going into overdrive

Figures released over the past few days show that 60% of the American population are better off than they were a year ago.

Naturally, President Trump takes the credit for the improvement in living standards but, the data fails to back his claim.

The rise has come from an exceptionally low base although there has undeniably been an increase in the perception of the economy over the past year. This is now backed by the data although it may be something of a castle built on sand given the burgeoning budget deficit.

Any credit that is due is more likely attributable to Trump’s bete noire Jerome Powell, and his determination to maintain the Fed’s independence in the face of intense criticism of the Central Bank Chairman for his handling of monetary policy.

It is a curious fact that the EU confidence levels are far higher than the actual activity reports, while in the U.S. there is a feeling of doom despite generally positive data.

Inflation is climbing in the U.S. which is not so far causing alarm bells to ring. It is doubtful that anything will be done until the annual increase reaches 2.5%. The most recent reading was 2.3% last month.

Producer price data will be released tomorrow. This is something of a precursor of future consumer inflation as it shows increases in factory gate prices. The consensus is for a rise from 1.3% in December to 1.4% in January.

Yesterday, the dollar index took a slight breather from its recent rise. It traded in a narrow range between 99.04 and 99.21, closing at 99.16

Ecofin discusses need for greater fiscal stimulus

The Committee of EU Finance Ministers, which is currently meeting, is discussing ways in which it can boost fiscal cooperation. The finger is being firmly pointed in the direction of Germany which reported significantly weaker than expected growth in 2019, but also recorded a record budget surplus.

It is all very well saving for a rainy day, but it is vital that the umbrella is used when the storm comes, as it undoubtedly has across the Eurozone.

Fears of a further downturn with increased momentum is driving Finance Ministers towards a draft plan that has been drawn up in which various stimulus measures are considered.

States with slower growth are looking for greater investment from the broader Eurozone in order that their intentions in joining the group can be fulfilled. It seems that there is a view that newer members are feeling that giving away their sovereignty has not been rewarded with the degree of economic prosperity they were promised.

The official wording of the document being discussed states If downside risks were to materialize, fiscal responses should be differentiated, aiming for a more supportive stance at the aggregate level. Roughly translated that means the time has come to smash the piggy bank.

Individual Governments will remain in control of whether to implement the Ecofin recommendations and that remains the issue with any kind of fiscal union.

The EU or Eurozone is wary of taking the final leap into a fully-fledged fiscal union despite their readiness twenty plus years ago to pledge to a monetary union. Perhaps the issues that the region has faced over that time make the individual nations wary of any further commitment and prefer to remain in the current halfway house.

Yesterday, the single currency remained just above support at 1.0820, making a low of 1.0829. It closed at 1.0833

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.”