20 Mar 2019: Sterling steady as Brexit unravels

Sterling steady as Brexit unravels

March 20th: Highlights

  • May in Brussels as EU stands firm
  • Dollar awaits FOMC meeting
  • Euro nearing a floor?

EU Frustration at boiling point

EU Officials in Brussels, backed by the 27 remaining Heads of State, have finally reached the point where their frustration with the inability of the UK Government to pass the Withdrawal Bill and continued dithering over a solution is at breaking point.

Theresa May is heading to Brussels to beg for an extension to the UK’s departure from the EU on March 29th. EU officials are in no mood to provide such a facility without some concrete idea of the purpose of the extension. If it is to allow further prevarication it is doubtful that any extension past three months will be agreed since it will interfere with the European Parliamentary Elections which will prove both costly and counter-productive to the UK’s departure.

Yesterday’s Cabinet Meeting, which was convened to decide the terms that the UK would request from Brussels, apparently descended into chaos while Ministers failed to agree on the purpose and length of the extension.

The pound rallied as the possibility of a no deal departure faded further but quickly returned to its recent range. It made a high of 1.3311 and closed at 1.3268.

Yesterday’s employment report recorded the lowest number of people unemployed since the early 1970s. This data has always been subject to some questions as the numbers include part-time workers, those on Government sponsored schemes, and various other employment incentives. The fact that tax revenues are not similarly at record high levels adds to the general mistrust of the data since record numbers employed should produce record tax revenues.

Today sees the release of inflation data for February with the headline CPI is expected to be below the Government’s 2% target, remaining unchanged at 1.8% YoY.

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Fed unlikely to “rock the boat”

After years of inaction where they exhibited a clear “hands off” policy, it now seems that every G7 Central Bank meeting is expected to “pull a rabbit from the hat” and produce further policies which will prove to be a remedy for all that ails, both individual growth and the global economy.

Today’s meeting of the FOMC in New York will try to reassure markets that last year’s rate hikes in the U.S were nothing more than an attempt to head off any overheating in the economy and were designed to ensure a steadier more constant level of growth. While not actually confirming the fact, Jerome Powell is clearly of the opinion that last year’s hikes were in reaction to the President’s tax cuts and other stimulus measures.

The dollar index continued its recent run of falls yesterday. Overnight, the greenback has found a little support attributed to a rise in risk aversion due to rumours that the current round of trade talks between the U.S. and China may not end with an agreement.

The dollar index fell to a low of 96.29, closing at 96.40. In Asian trade, it has so far climbed to 96.50 although it is unlikely to rally much further ahead of the FOMC meeting later today.

Weaker euro aids Eurozone trade

The surprising rise in the Eurozone trade surplus has been attributed to the weakening euro by traders, although there are signs that despite falling output and both industrial and consumer sentiment, the worst for the region may not be as bad as had been first feared.

With inflation well under control, the ECB can allow the euro to fall further although it won’t be helped in that quest by the U.S. economy which is faltering, and the outlook as portrayed by the FOMC later may see the single currency rise a little.

With the ECB facing an upwards task to provide enough stimulus to turn the current downturn away from anything more serious, its benign neglect for the currency is close to becoming official policy.

Despite opposition, the Eurozone, driven primarily by French President Emmanuel Macron, is inexorably moving towards a more integrated Fiscal Policy. A Eurozone-wide budget is, according to M. Macron, a much-needed defence against a repeat of the financial crisis which came close to destroying the entire region.

Macron’s plans include a single budget for the Eurozone and the appointment of a single Finance Minister. According to the French President, the process could work in a similar manner to the American Federal Budget.

Where this leaves individual adherence to the growth and stability pact is hard to say since, in the ECB’s own words, they only look at the entire region’s performance. Any significant change to the fabric of the Eurozone could easily wither on the vine should Macron’s standing fall further as civil unrest continues in France or the upcoming elections show a large upswing in the populist vote.

The euro was in a narrow range yesterday versus the dollar. It traded between 1.1362 and 1.3333, closing at 1.1352.

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.”