Next Chapter? Or more of the same?
April 23rd: Highlights
- Sterling below 1.3000 on low liquidity
- Can things get any worse for the single currency?
- Market awaits Q1 GDP to confirm the Fed’s stance
Cross-Party talks set to resume
There are several immutable facts that will make finding a compromise impossible: The Government is committed to leaving the customs union and single market, the opposition wants to find a way to remain. Brexit has divided senior members of the Government to such an extent that agreement among themselves, let alone with anyone else, is virtually impossible. Labour wants a general election more than it wants to find an agreement with the Government.
So, Brexit returns to the front of people’s minds after the Easter break with the extension until October 31st, the third departure date, providing a clearly defined end to the issue since Brussels has indicated it is a clear line in the sand.
The length of the extension is an issue in itself. With a breakthrough unlikely before voting takes place, the UK will have to field candidates in the European Parliamentary Elections at the end of next month. This can only add to the sense of farce with the newly formed Brexit Party apparently well ahead in the polls.
The pound fell below 1.3000 versus the dollar on Thursday as a lack of liquidity signalled that there is still downside pressure despite traders remaining side-lined awaiting a definitive solution. It reached a low of 1.2978, closing at that level and has barely moved until this morning.
There is no significant data to be released this week, so it is likely that the pound will drift a little higher as traders await any outcome from politicians talks.
Euro on the floor as data continues to predict a recession
There is a point in every political cycle when it reaches its bottom. Economic activity has reached a low, sentiment is on its knees, and the Central Bank has usually put in place plans to stimulate growth.
Two of those conditions are in place and the ECB is seemingly content to rely upon “natural effects” to turn things around, blaming outside influences for the issues facing the region.
Last week, Olaf Scholz, the German Finance Minister, ruled out the possibility of his country increasing its public debt in order to stimulate activity. He remains in agreement with his colleagues in Brussels, blaming the lack of activity on “global issues” around trade and protectionism. He is also concerned about the UK leaving the EU with no deal which will affect German manufacturers.
The single currency was pressured by a stronger dollar last week falling to a low of 1.1226 on Thursday although it has recovered a little in holiday-thinned trade reaching 1.1264.
The German economy will come under further scrutiny tomorrow as the influential IFO Group releases its assessments of its current state, future expectations and business climate. This is unlikely to have fallen from its lows seen last month as, in concert with the rest of the region, the economy reaches close what is seen as its lowest point.
GDP data to provide another reference point for the Fed
The U.S. economy is expected to have grown by between 1.8% and 2% which will be seen by the markets, if not by the President, as reasonable given the current global conditions.
President Trump is likely to use a fall to below 2% as a stick with which to beat Fed Chairman Jerome Powell for his Committee’s willingness to hike rates through the second half of last year.
Q1 corporate earnings reports are starting to be released and for the first time in three years, it is expected by analysts that they will decline year on year.
This week will be the busiest point in the earnings season with results expected from Boeing, Facebook and Amazon among others. Although a downturn in earnings is expected, it is the scale of the fall that will exercise markets the most.
If GDP is at the low end of expectations and the major corporations report significant falls in earnings, traders will shift their outlook for the Fed’s next action to “cut” although that will still be unlikely to take place before the end of the third, or more likely the start of the fourth quarter.
The dollar’s short-term trajectory is bound to these two events with the risk clearly to the downside. Lower than expected data will see the euro rally again away from its recent lows and will provide some relief given the state of the Eurozone economy although inflation is well controlled.
The dollar index reached a high of 97.49 on Thursday but has gradually drifted lower retracing to 97.26.
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.”