22 Mar 2019: May’s Deal, or No Deal

May’s Deal, or No Deal

March 22nd: Highlights

  • MPs given a stark choice
  • Volatile dollar reacting to Fed rate news
  • Activity indexes to provide short term direction for single currency

EU grants Mays request for a short extension but with a proviso

Theresa May the UK Prime Minister was forced yesterday into the humiliating position of virtually begging Brussels for a short extension to the UK’s departure from the EU following the inability of Parliament to agree on a strategy.

That the EU is now in total control of the UK’s fate is a terrible indictment of MPs and this is now illustrated by an online petition which has now gained more than 1.3 million signatures calling for Brexit to be abandoned.

The summit of EU leaders which continues today showed just how frustrated the other members have become as Brexit takes up the entire agenda of such meetings. They agreed to a short extension to the UK’s departure until May 22nd provided Parliament votes in favour of the Withdrawal Agreement. If not, the extension will be until April 12th.

It is likely that MPs will be given a chance to vote for a third time next Tuesday where they will be faced with approving the agreement or leaving without a deal. There have been so many important weeks where it looked likely that a decision would be reached but next week will genuinely be make or break for Brexit, Theresa May and possibly the Government. If the Bill fails again, the Opposition may call another vote of confidence in the Government which could easily pass, throwing the country into chaos.

The pound, which had fallen to a low of 1.3003 earlier in the day recovered as it reacted to the Government given one last chance to salvage a deal, closing at 1.3106. It has rallied a little further overnight versus a weakening dollar, reaching 1.3145.
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The dollar continues to react to dovish Fed

The decision of the Federal Reserve to abandon plans for any further increase in short-term interest rates continues to be digested by the financial markets.

Asset markets are reacting to the Fed’s decision positively with the Dow Jones Index breaking above 26,000. The dollar continues to try to find support, trading in a range yesterday between 96.60 and 95.82, eventually closing at 96.35.

News that a delegation headed by Treasury Secretary Steve Mnuchin would visit China in the coming weeks and the Chinese Vice-Premier will visit Washington in early April lifted concerns over rumours that it may take the rest of the year for the U.S. and China to agree on a trade deal.

The Fed’s cutting of the growth outlook for the U.S. for the rest of the year has come as a surprise to markets that had been expecting Chairman Jerome Powell to commit to a “steady as she goes” data-centric attitude to the economy. Recent data releases, while not as strong as were seen last year, hardly pointed to a significant slowdown in activity.

Traders will now be highly sensitive to data releases with housing starts and consumer confidence being released next week. Trade data will also be released and that will provide a backdrop of continuing talks between the U.S. and China. With the deficit having reached $80 billion in December, the market will be poised to react to a further increase.

The final cut of Q4’18 GDP will also be released next week. It is possible given the Fed’s dovish tone that it may be cut from 2.6% to 2.4%.

Euro awaits activity data

Today sees the release of data for activity in the manufacturing and services sectors for the Eurozone. While manufacturing will still show a contraction in activity, it is likely to have risen from 49.3 to 49.5. Services activity is still expanding but not sufficiently to take the attention away from manufacturing.

It had been expected that Brexit would drive services activity away from London with Paris and Frankfurt expected to benefit but so far that has not happened. Services activity is expected to have fallen from 52.8 to 52.7.

Individual nations will also issue activity data with Germany still struggling with manufacturing having contracted for the second month in succession.

The euro resumed its downtrend yesterday following its brief rally in reaction to the Fed decision. It reached a low of 1.1342, closing at 1.1374. It remains within its recent range and is awaiting a catalyst for its next significant move.

Next week sees the release of confidence and sentiment indexes for the Eurozone. These are all expected to be weaker than have been seen recently as, despite low inflation, consumers continue to be concerned about jobs and businesses see order books that are shrinking.

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.”