20 December 2019: Queen’s speech full of good intentions

20 December 2019: Queen’s speech full of good intentions

Queen’s speech full of good intentions

20th December: Highlights

  • Commons majority a blessing and a curse
  • Trump’s impeachment little more than an inconvenience (for now)
  • Eurozone most desperate for deal top fee up global trade.

Economic slowdown to linger as no deal fears grow

The financial markets remain concerned about the trade negotiations between the UK and EU going badly and the UK, having technically left the EU in a months’ time ending negotiations in a year with no deal in place.

Yesterday’s Queen’s Speech in Parliament was full of good intentions as the Prime Minister made good on his election pledges. However, it has been a long time since a Government was able to govern virtually as it pleased and as time goes on some of the pledges may become watered down.

The pledge to provide £34 billion of new funding every year to the NHS was enshrined in law to appease doubters and show new Conservative voters from last week’s election that their expectations will be met.

The economy continues to falter as this week’s data illustrates. Services activity continues to contract despite an expectation that last month’s fall below the 50 level which denotes expansion or contraction was expected to be a “one-off”. Manufacturing continues to contract but with the clouds of Brexit hopefully clearing, manufacturers will have more confidence to invest and expand.

The positive employment data was mostly disregarded as the data is subject to so many “adjustments” relating to training, part-time work and other schemes that it is hard to compare like with like.

Core inflation remains benign at 1.5% in November and the latest meeting of the MPC (Carney’s last) passed by with barely a mention as rates were left on hold at 0.75%.

The pound has retraced all its pre- and post-election gains as no deal comes back to the fore. It fell to a low of 1.2989 yesterday, closing at 1.3012.

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GDP data to drive dollar short-term

Donald Trump is likely to “swat away” the impending impeachment trial like a troublesome insect as the New Year brings the start of the 2020 election in earnest.

The fact that his Republican Party know that he remains their best chance to remain in power for four more years should be enough to sway any doubters in the Senate to vote down the charges.

While the votes were being counted in Congress on Wednesday evening, Trump was at a rally 600 miles away apparently unconcerned and “calling out” the Democrat led House for creating a story where none existed.

While 2020 will be characterized by the election, in the short to medium term, the economy will continue to be the primary driver of the market. That starts today with the next read on Q3 GDP. which is expected to remain at 2.1%. While this remains one of the stronger growth rates in the G7, Trump is likely to demand more, mostly from looser monetary policy, although the FOMC remains stoic in its view that rates are set at the right level currently.

One of the Fed’s major concerns is over digital currency since it doesn’t know the effect on the economy of major uptake of Facebook’s digital currency will be. The social media firm’s global reach means that uptake could spread very fast with unknown consequences for the global economy and Central Bank’s ability to control money supply.

Yesterday, the dollar index was virtually unchanged on the day. It opened at 97.48 and closed at 97.42

Is the slowdown terminal or a prolonged soft patch?

German influence over every aspect of the EU continues to grow with the appointment of Ursula von der Leyen as the new President of the European Commission. It has always been the case that Germany, with by far the largest economy in the region was going to be dominant. Cynics would remark that that was one purpose behind the growing “Federalization” of the group.

However, it would have surprised commentators and economists alike to find that the German economy has become something of a “drag” on the overall economic performance of the Eurozone. Germany has been hit by something of a perfect storm economically; Brexit and its effect on supply chains, Eurozone demand and consumption falling and the ongoing trade talks between Washington and Beijing dampening global demand.

It is difficult for either the Federal Government or Bundesbank to be able to influence these three drivers and while it will have to “batten down the hatches” and ride out the storm it is acutely embarrassing for Germany to be seen as such a drag on activity.

This week’s data has continued to illustrate a Eurozone that is stagnating with data failing to show anything other than an economy “bumping along the bottom”.

The region awaits further details on the agreement of Phase One of the trade deal but will be eagerly awaiting further talks which will probably have a greater effect on global trade since Phase One was all about the bilateral relationship between China and the U.S.

Yesterday the euro gained four pips on the day versus a becalmed dollar. It opened at 1.1119 and closed at 1.1123.

With the Holiday Season about to start the market will start to wind down although a lack of liquidity may exacerbate any move should an unexpected event occur.

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.”