Tories lead but pound’s upside Limited
19th November: Highlights
- Election uncertainty to provide increased volatility
- Market struggling to make sense of trade negotiations
- Will a prolonged recession lead to the demise of the euro
Brexit deal possible within the proposed time frame
The most significant “banana skin” for the Conservatives remains their leader. Boris Johnson is prone to gaffes and may find himself under pressure from the more considered Jeremy Corbyn this evening when the first televised face-to-face debate takes place.
The two leaders will face off and are likely to face a severe “grilling” at which it will be sensible to hold back on any new policies and concentrate on current plans and prepare to be defensive. Corbyn is certain to attack the Government’s record over austerity and the effect it has had on various public services, not least, hospital waiting times. Johnson is likely to retaliate over Brexit pointing to Labours dithering over policy and its sabotage for purely political reasons Johnson’s Brexit Deal.
Yesterday the leaders of all three Parties spoke at a conference sponsored by the Confederation of British Industry, the “bosses union”. Each said that their Party is the Party of business but only Johnson was able to create a “buzz”. He announced that a proposed cut in business taxation was to be shelved and the saving from that will be pumped into the NHS. While it may not have been the most suitable forum for such an announcement, it has been well received by the media.
Yesterday the pound rallied to a high of 1.2986 versus the dollar, closing at 1.2946. It is still hemmed in by the psychologically important 1.3000. However, a gaffe free performance from the Prime Minister this evening may provide the boost it needs.
Does a deal defer the dollar’s safe haven status
Given the foreign policy performance of Donald Trump as U.S. President, should he become certain to be re-elected, the doubts may easily start up again. Iran, North Korea and Palestine are countries where Trump’s performance has been controversial and his withdrawal of the U.S. from the Paris accord on climate change has angered several of his G7 partners.
That is one reason outside of the obvious why the trade talks between Washington and Beijing are so finely balanced. There is no doubt the U.S. and China need each other. The sheer size of Chinese industrial production needs a similar sized consumer and the U.S. provides such a resource. However, the U.S. needs China to continue to fund its Government debt and China knows that while it continues to do so, it can be confident that the U.S. will continue to buy its products. Were talks to break down without a positive conclusion, that could easily usher in a period of protectionism that would affect the U.S. but could also be disastrous for the Eurozone. That is the primary reason why the two nations continuing to talk remains a positive for the global economy.
The dollar index, unable to break resistance around the 98.00 level, continued to retrace yesterday, again ending the day lower. It reached a low of 97.68, closing at 97.82.
Monetary union in danger of “falling short”
With hindsight, it is easy to recognize that there was a potentially fatal flaw in the agreement of monetary union without fiscal union being also agreed upon or at least considered.
As the economy slowly drifts towards recession the stalwarts of integration; Germany, France, Holland, Belgium, Spain and Italy need to show resilience although at least one of those nations may be unable to support closer integration.
With the UK about (probably) to depart the EU another high-profile departure could sound the death knell for the entire project.
Monetary Union was a relatively easy sell when it was first introduced. The most important facet, as was seen by the UK and Italy in particular, was the level at which each country’s currency entered EMU. Those “wrinkles” have been ironed out over the last twenty years and each member of the Eurozone has a currency that Germany may feel is too strong and Italy too weak, but they can live with it.
Fiscal Union is a whole different “ball game”. To try to facilitate a common taxation policy across nineteen such divergent economies will be close to impossible. Taxation will need to be both “Federal” and “local” to work. Spending will also be an issue that is potentially insolvable. While nations are currently fined for disregarding the growth and stability pact, a future where there is a single budget and major social programmes need to be centrally agreed could be a step too far for some nationalist-leaning nations.
That is for the long term. In the short-term, data for consumer confidence as well as manufacturing and services output will be released this week with the market conditioned to expect little upside progress. There is also an ECB meeting with no change to official policy expected.
New ECB President Christine Lagarde speaks on Friday and it is possible that she will outline her programme for reform, once she has her first monetary policy meeting behind her.
Yesterday, the single currency rose to the top of its recent range reaching 1.1091, closing at 1.1074. It is unlikely to breach 1.1120 without either some positivity in the data or a continued retracement for the dollar index.
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.”