Has Merkel blinked first?
August 22nd: Highlights
- Johnson given thirty days to find backstop alternative
- Fed’s “mid-cycle adjustment” leaves market unclear
- Euro yet to fully price-in Italian political chaos
Johnson given “blistering” deadline by Berlin
Sterling rallied briefly on the news as traders saw their worst fears over the economic reality of a no-deal Brexit being removed. However, French President Emmanuel Macron later seemed to pour cold water on Merkel’s offer commenting that reopening Brexit negotiations was “not an option”. Sterling fell back on this news.
It seems that Merkel is prepared to be more flexible given the parlous state of her nation’s economy while Macron has always been far more “hard-line” in his attitude to the UK’s departure, refusing to countenance the reopening of negotiations.
Macron gave some insight into the “real” feeling in Paris suggesting that a trade deal with the U.S, something that the EU has found extremely difficult to achieve, won’t make up for the hardships caused to the UK by a hard or no-deal Brexit.
Johnson professed himself to be happy with the “blistering schedule” of finding a solution in thirty days, while traders will await a more positive outcome before allowing themselves to become more hopeful.
The pound reached a high versus the dollar of 1.2177 but fell back to close at 1.2127. Against the single currency, the pound was also mixed, closing at 1.0939, now seemingly unable to regain the 1.1000 level.
Fed as unsure as traders over U.S. prospects
Historically, the Fed’s comments and deliberations have been a reliable signpost for the market but under Jerome Powell, that has changed somewhat. Traders are used to the Central Bank being driven by market events or what is termed “data dependent” but over the past eighteen months or so a different dynamic has set in.
It is possible that Powell’s background as a lawyer rather than an economist makes him less drawn towards making solid or definite predictions being more drawn towards prevarication.
President Trump is, of course, the exact opposite, since where Powell may appear to prevaricate, Trump is clear that the economy is doing extremely well, but also calls for rate cuts.
This is equally confusing for the market, so traders were hoping for clarity but fearing more “waffle” when the minutes were produced yesterday.
They were left no surer of the direction the Fed wishes to take as the recent interest rate cut was labelled a mid-cycle adjustment. This is a new phrase although at least it could be interpreted that it is considered that the current economic cycle is considered to have some way still to run and, therefore, a slowdown is not predicted, yet.
With two weeks until the employment report and a further two following that until the next Fed meeting, even though the market will be “getting back to speed” following the holiday season, the dollar faces a further period of consolidation (some may say confusion) before another signal is provided by the economy.
Yesterday, the dollar index traded between 98.33 and 98.13, closing at 98.30.
Is “Italexit” a possibility?
Having created a coalition Government with two Party leaders, both of whom are admittedly to the right of centre, hopefully, held in check by an independent and more centrist Prime Minister, it had been hoped that a period of stability had arrived driven by the membership of the EU which provided a degree of economic stability.
Sadly, it appears that it is not to be, as another trait of Italian politics has returned. Egotistical leaders are not uncommon and with the result of the EU elections in May supporting Matteo Salvini’s Lega Nord Party over Luigi di Maio’s Five Star the scene was set for what we have seen over the past few days.
It has proved too much for the “compromise” Prime Minister and Giuseppe Conte has resigned. There is a real fear that should Salvini, who favours fresh elections, win a new poll, Italy could be asked the same question as the UK was in 2016 and that is “should Italy remain within the EU and more significantly the Eurozone?”
While there is a considerable majority in favour of remaining a member of the European “family” the questions will always be asked; “Have Italy’s fortunes been enhanced or hampered by membership?” and “why do we need to be so closely controlled by Brussels and Frankfurt?”
These concerns are sure to be stirred up by Salvini in any election campaign but it is unclear whether he would go as far as to campaign on a manifesto which would lead to Italy’s departure from the EU although he may seek a referendum giving the public a chance to decide.
It is hard to say just what effect would have on the rest of the region. Could it galvanize populist/nationalist Parties in other countries? Could it bring down the entire Eurozone? These are questions for the future while Italy grapples with yet another political crisis.
The single currency has so far failed to react to the possibility of a nightmare scenario developing. Yesterday, it drifted lower as the market awaits today’s activity data from Germany and the wider Eurozone. It reached a low of 1.1080, closing at 1.1084.
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.”