Eurozone facing a prolonged slowdown
February 19th: Highlights
- ECB to reduce growth and inflation projections
- Sterling awaits definitive Brexit developments
- Dollar’s drivers lead to an impasse
ECB Meeting to confirm economic fears
From day one (and probably before), the idea that “one size fits all” has been doubted. The rush to allow several countries in has been based upon their desire to join the “club” rather than their ability to contribute and abide by the rules.
Concerns have grown that founding countries like Italy and Spain may be the first to leave based upon their inability to maintain their debt to GDP ratio and budget deficit at levels acceptable to Brussels. However, it is now emerging that it may be Germany, seeing little benefit in being a member, that “jumps first”.
While this may appear alarmist, it illustrates the constant questioning of the ethos of the combining of such a disparate group of economies.
The fact that after over eight years as ECB President Mario Draghi will leave office in November having never seen sufficiently robust growth or inflation at a level that encourages a rise in interest rates is a perfect illustration of the constant concerns surrounding such an experiment.
Yet again, Sr. Draghi sees himself presiding over a looming crisis which, despite optimistic words, he and his colleagues lack the tools to defeat.
It is hard to make a case for a stronger euro based upon its own merits and it would depend on a collapse of the dollar which in the current environment appears unlikely.
Yesterday, the single currency traded between 1.1294 and 1.1335 versus the dollar, closing at 1.1314.
Sterling unaffected by political defections
As a prelude to a post Brexit “shake-up” in British politics, this is a major event but in the context of the current morass, it changes nothing.
There is still a huge fracture between the “wishful thinking” of Government Ministers who say that talks in Brussels are “progressing” and the official line from EU Officials who say that they still await firm plans from the UK as to what they actually want. With so many false dawns, it is hard to imagine next week’s definitive vote in Parliament solving anything.
The issue has now seemingly been distilled down to a few potential outcomes:
- A delay to the triggering of Article 50
- A second, or people’s, referendum
- May’s plan
- No deal
It appears the country is lurching towards no deal as the default since the other three outcomes face either practical difficulties or lack the support of MPs and/or the Government. Financial markets are still not pricing in the turmoil that no deal will bring even if concern over that outcome is being stirred by what Brexiteers label “Project Fear”.
Sterling remains within a broad 1.2800/1.3000 corridor, reacting day to day to various economic releases.
The release of employment data, which was originally slated for yesterday, will now take place today at 9:30am UK time. The unemployment rate is expected to remain at or close to 4%. The gap between wages and prices will have widened considerably following the fall in inflation in January. Wages are expected to have risen by 3.4% last month compared to 3.3% in December
Yesterday, the pound reached a high of 1.2939 and closed at 1.2928 in quiet trading due to the holiday in the U.S.
Dollar at a crossroads
I have often written about the different external and internal factors which affect the value of the dollar be it monetary policy driven by economic activity on one side or global risk appetite/aversion on the other.
Since the start of 2019, those two diverse dynamics have seen the dollar index trade between 95.03 and 97.37 which, when compared to the previous few quarters, shows a lack of direction.
It appears that the internal and external factors driving the dollar are currently balancing themselves out. We await an outcome, one way or another, from trade talks between the U.S. and China or a radical statement from the Federal Reserve on interest rates to drive both activity and direction for the dollar.
Following yesterday’s President’s Day holiday in the U.S., the obvious driver for the greenback over the rest of the week will be the release of Purchasing Managers Indexes for Manufacturing and Services on Thursday. Both are expected to comfortably show continued expansion although at a slightly reduced rate.
The dollar index fell to a low of 96.65 yesterday, closing at 96.80. It has recovered those losses overnight, trading up to a high of 96.93.
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.”