21 Nov 2018: May Fights On

May Fights On

November 21st: Highlights

  • Prime Minister heads to Brussels today
  • U.S. equities plunge wipe out year’s gains
  • Italy “ups the ante” by threatening EU Budget veto

PM’s opponents struggling to fulfill threat

While British Prime Minister Theresa May is no further forward with her struggle to gain acceptance for the draft Brexit agreement, her opponents appear to be losing momentum in their quest to topple her. The European Reform Group headed by “arch Brexiteer” Jacob Rees-Mogg are spearheading the campaign to obtain the forty-eight letters of no confidence from MP’s that are necessary to force a leadership vote but now appear to be falling short.

Yesterday was “business as usual” for Mrs. May as she addressed a conference of the Confederation of British Industry to sell her plans to business.

However, her problems lie with obtaining the approval of Parliament and her chances of achieving that goal took a significant hit yesterday. She appears to be losing the support of Northern Irish MP’s who refused to support the passage of the Budget Bill through the House of Commons.

This was a clear show of what the Prime Minister can expect should she seek to cast Northern Ireland adrift from the rest of the UK, as seems likely, in her desire to obtain a deal with Brussels.

The pound had been trading in a narrow range until late in the day when the market lost its nerve and started another selloff which reached a low versus the dollar of 1.2776. It has remained close to that level overnight as the market awaits further news.

One U.S. bank announced in a report yesterday that if the U.K. crashes out of the EU with no deal it expects the pound to trade at close to 1.1000 versus the dollar.

Mark Carney, the Governor of the Bank of England came out in support of the draft agreement yesterday also commenting that should a deal scenario happen, the market should not expect immediate emergency rate hikes form the Central Bank.

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Dollar higher despite fears of a slowdown

“It takes two to tango” as the old saying goes and in the current environment, bad news for the UK and Eurozone which pushes their currencies lower, tends to be reflected in a positive reaction for the dollar index.

So it proved again yesterday, as while there are concerns growing for the U.S. and global economies, the Dow Jones Index plunged by more than 550 points, yet the dollar index rallied to a high of 96.89, coming close to retracing all its losses from late last week.

The dollar’s reactive stance is likely to continue for the rest of the month as the market awaits the November employment report which may provide advance guidance as to the continued growth of the economy. It remains fairly certain that the FOMC will still hike rates at its meeting on December 18/19 where it will also provide its economic projections and Chairman Jerome Powell will face the press but the prospects for Q1 ‘19 are looking less positive.

A decoupling of the dollar from the domestic economy is not unusual given the dollar’s role as the global reserve currency and a safe haven for investors concerned about emerging markets.

Conversely, the prime driver of the dollar’s longer-term strength has been the growing interest rate differential as the Fed has forged ahead with three rate hikes, soon to be four, this year as other G7 Central Banks have been more circumspect. Should that differential remain unchanged for a few months and start to narrow, the dollar will lose a major plank of its support.

Rome on the offensive as budget row deepens

Italian Deputy Prime Minister Matteo Salvini, the most vocal of the coalition members over the row between Rome and Brussels over next year’s Italian Budget was on the offensive again yesterday.

He said that should the argument continue, Rome may use its veto at the European Council to halt the next seven-year budget for the entire region which is coming up for renewal.

The decision on the Eurozone Budget, which will run from 2021 is expected to be agreed by December, Italy’s threat has created a large degree of uncertainty in Brussels. The Budget is also a source of concern for the U.K. since, if the transition period is extended from December 2020 to December 2022, the UK may find itself expected to contribute.

Spain, fresh from a minor nationalist “flare-up” at the commemoration of the death of Francisco Franco at the weekend, also weighed into the Brexit debate yesterday, threatening that it would veto the current deal as it is concerned over the change in Gibraltar’s status. This is being seen as a somewhat cynical move by Madrid to extract concessions from the UK in the long-running dispute over British sovereignty over the Island.

The single currency fell yesterday following the escalation of the Italian budget issue, reaching a low of 1.1358 before closing at 1.1369.

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.”