21 August 2019: No backstop or no-deal

No backstop or no-deal

August 21st: Highlights

  • Brexit blame game continues
  • Italian coalition on brink of collapse as PM resigns
  • Dollar awaits FOMC minutes

Johnson and Tusk reach an impasse

UK Prime Minister Boris Johnson will meet German Chancellor Angela Merkel later this morning to discuss Brexit or more precisely how to avoid the UK leaving on October 31st with no deal.

With the German economy facing a recession Mrs Merkel hinted yesterday that she may be willing to look at alternatives to the backstop arrangement designed to ensure that there will never be a hard border between the two halves of the Island of Ireland.

Johnson wrote to the European Commission yesterday outlining his “demands” in order that a chaotic departure can be avoided. These were immediately rejected by EU council president Donald Tusk who was forthright in his reply, using social media to say: “Those against the backstop and not proposing realistic alternatives in fact support re-establishing a border. Even if they do not admit it.”

The pound rallied briefly following Mrs Merkel’s more promising comments but fell back following Tusks Tweet.
With seventy-one days to go until the UK leaves the EU and Johnson assuring Brussels that there will be no rebellion that can halt Brexit, it seems that it will be a matter of “no backstop or no deal.”

The pound traded between 1.2064 and 1.2182 yesterday closing higher on the day at 1.2169.

As the time for Parliament to return draws nearer, and the clock continues to count down towards October 31st volatility is sure to increase. With the holiday season coming to an end, liquidity will improve but may not be enough to prevent Sterling dipping below the psychologically important 1.2000 level versus the greenback.

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Conte resigns, blames di Maio and Salvini

There is a quote from a U.S. populist campaigner that the very nature of populism means that there can only be one leader. That view is being borne out in Rome as the right-wing populist coalition which swept to power fourteen months ago implodes.

The ambition of Matteo Salvini, the leader of the Northern League Party, has overtaken that of his colleague and coalition partner, Luigi di Maio as their popularity has moved in opposite directions.

The compromise Prime Minister Giuseppe Conte has resigned, placing the blame for the coalition becoming “unworkable” firmly at the feet of Salvini, who he labelled an opportunist.

Conte’s resignation effectively means the collapse of the coalition and Italian President Sergio Mattarella, having accepted Conte’s resignation, plans to meet with Di Maio and Salvini to decide what happens next.
With Brussels watching eagerly, what is purely a domestic issue despite its ramifications for the wider EU, a lot depends on how radical Salvini chooses to be in his quest for power.

With the Eurozone teetering on the brink of a recession, Salvini has been vocal in his criticism of the “financial handcuffs” that have been placed upon the weaker nations of the region. He has been calling restrictions on budget deficits to be raised or scrapped entirely for Italy to be able to borrow and spend its way out of the slowdown.

So far, the reaction of the single currency has been relatively muted. This is likely to change as the picture of what happens next becomes clearer. With tomorrow’s activity data likely to pressure the currency further the outcome of the political chaos in Italy could be a catalyst for the euro to break 1.1000 versus the dollar.
Yesterday, the euro clawed its way to a high of 1.1108 versus a weaker dollar, closing at 1.1096.

FOMC minutes, Jackson Hole and data to drive greenback

The Jackson Hole Symposium, America’s answer to the annual Davos Conference, starts today with the emphasis very much upon the fate of the global economy.

Despite criticising Fed Chairman Jerome Powell for any issue with the U.S. economy and calling for a more aggressive programme of rate cuts, President Trump continues to blame any talk of a slowdown or recession upon “fake news”. He commented that this news is being spread since his opponents believe that this will harm his chances of re-election.

Later today, the minutes of the most recent FOMC meeting will be published following the requisite three week “cooling off” period. Traders will be eager to see who said what at the meeting with the main points being growth forecasts and the outlook for inflation.

If the prime goal were inflation, then the “one and done” theory over last month’s rate cut would probably be true since price increases are starting to tick up towards the Fed’s 2% target having reached 1.8% last month from a previous reading of 1.6%.

However, concerns remain over the true state of the economy with recession signposts like the inversion of the yield curve pointing to a slowdown if not contraction. Certainly, the data that has been released recently seems to conform to the view of President Trump and his Chief Economic Advisor Larry Kudrow although the picture may be a little less positive than they believe.

With September 1st falling on a Sunday, and Labor Day, the traditional end of the summer, on September 2nd, the release of the employment report will be on September 6th. This report will be as eagerly awaited as ever although there will be extra interest over the headline. Will it breach +200k again allowing the FOMC to continue to deliberate? Or will it remain around last month’s +164k which could spur the FOMC to further action?

Yesterday, the dollar index corrected its recent gains, falling to a low of 98.12, closing at 98.16.

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.”