No deal looms as business frets
December 19th: Highlights
- PM rules out a second referendum
- FOMC to hike today but markets await economic projections
- Italy still toying with the idea of abandoning the euro
Cabinet discusses no deal outcomes
Now attention will turn to the consequences of a defeat for the draft Brexit agreement by Parliament. All signs now appear to point to a stark choice: either the current deal or no deal at all. The Prime Minister ruled out a second referendum, labeling it an “abrogation of responsibility.”
Business leaders voiced their concerns over the “squabbling” at Westminster that has taken away valuable time from preparations that should be being made for no deal. With 100 days to go until the UK leaves the EU, the Confederation of British Industry (CBI) commented that for its members the idea that a no deal Brexit can be managed is not credible. The sheer weight of imponderables from air traffic control to cash machines makes an unprepared no deal a catastrophe for business.
The pound rallied initially yesterday on hopes a no deal Brexit can be avoided but those hopes quickly faded as news was released that the Cabinet had discussed using 3,000 troops to aid Government plans should March 29th come with no deal in place.
Sterling reached a high of 1.2706 versus the dollar but quickly retreated to close at 1.2636.
FOMC meeting pivotal for the dollar
Powell will also release the FOMC’s economic projections for 2019 with growth and inflation prospects the major points of interest. Powell has fuelled talk of a slowdown recently by voicing concerns over the global economy, the fading effect of the tax cuts and the lagged effect of previous rate hikes.
Market watchers are focussing on the word “gradual” being in Powell’s comments.
“Gradual” has come to mean a rate hike at every other FOMC meeting, so Powell’s use of that word today should be positive for the dollar. However, should he use different language to describe the Fed’s plans the market may feel that there is a concern over future growth and the dollar may correct further.
President Trump has been vociferous in his condemnation of the Fed’s actions in 2018 despite his initiation of the Q2 GDP growth spurt to 4.1% which fell a little to 3.5% in Q3. It is expected that the rate of growth in Q4 will be like Q3 but we will have to wait for late January for confirmation. The FOMC will have received enough data prior to the meeting to make an educated guess as to what the figure will be.
Yesterday, the dollar index fell again, continuing its recent correction which betrays the market’s concerns for the euro which rallied again (see below). The index reached 96.70 before rallying a little to close at 97.06.
Dollar falls mask euro concerns
Emboldened by the fact that Brussels seems to have no answer to the budget issue, the Nationalist coalition in Rome is looking at the euro and what effect it has had on the Italian economy since its introduction in 1999. The debate about whether the single currency has been good for Italy rages on. There is little hard evidence to back anyone who believes that the euro has been positive. Unemployment has barely declined and productivity has fallen.
But the Italian issue is a bit of a curiosity. While Spain has seen unemployment sky-rocket, its economy has grown at four times the pace of Italy’s. France has also consistently grown at a faster pace than Italy.
Could it be the size of Italy’s national debt, currently 138% of GDP, that is constantly holding it back? The Coalition is looking at the radical step of abandoning the euro despite its popularity with the man on the street in Rome Milan and Naples. As has been seen before, with devastating consequences, nationalist Governments tend to blame outside influence for their country’s woes when they come to power.
Yesterday, the single currency rallied initially against a weaker dollar, reaching 1.1403 before closing at 1.1363.
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.”