24 Apr 2019: Sterling hit by a double blow

Sterling hit by a double blow

April 24th: Highlights

  • Cross-Party Brexit talks making no progress
  • Dollar rallies as data eases concerns over the economy
  • Euro struggling in the face of a stronger dollar

May to resurrect her Withdrawal Agreement

In a move which highlights the lack of fresh ideas over Brexit, UK Prime Minister Theresa May is going to bring her draft Withdrawal Bill back to the House of Commons next week for MPs to vote on it for the fourth time.

This is clearly a signal that the extended period that Brussels granted London to find a solution may turn out to be a waste of time. Mrs May was hoping to find a solution in order to avoid Britain fielding candidates in the European Parliamentary elections. There are local elections in the UK on May 2nd which are likely to be used for protest votes by the electorate with the two main parties likely to fare very badly. With the newly formed Brexit Party well ahead in polls, should the UK have to field candidates in the EU elections, the established order is likely to face a double hit in the coming weeks.

It is looking increasingly like a straight choice between no deal and May’s deal now since Parliament is unable to agree on any of several suggestions that have been put forward by MPs and Brussels continuing to say that the existing deal is the only one on offer.

The return of Brexit following the MPs extended break has shown that there have been no fresh ideas brought to the table and the pressure on Mrs May to resign or call a General Election is mounting.

Yesterday, the pound showed a muted reaction to the continued Brexit fiasco. However, it did fall to 1.2927, closing at 1.2936, versus a dollar which found some wind beneath its wings (see below).

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Dollar hits a 22-month high on hopes for the economy

Those with 20/20 hindsight will say that yesterday’s rally for the dollar had been coming for some time. That, of course, totally flies in the face of concerns that the Q1 earnings season which kicked off in earnest yesterday was feared to be the first in three years where year on year results declined. It would also mean that the market was clear that the current hiatus in actions by the Federal Reserve is simply a pause.

The relative violence of the dollar’s move higher shows that the market was caught unprepared, fully expecting a quiet start to another holiday-shortened week and simply waiting for the release of Q1 GDP.

The improvement in housing starts, which were released yesterday, when taken in addition to other recent data, makes it more and more likely that the Fed is indeed simply pausing for breath.

The general sense that the U.S. economy is in good health pushed the dollar index to its highest level since June 2017. It reached a high of 97.78, although it settled back to close at 97.56.

Q1 earnings released so far by S&P 500 companies are beating analysts’ expectations by a margin of 3:1 which has also provided a boost to expectations for a stronger than expected growth report which will be released on Friday.

With significant contributors to the index suffering form their own issues, traders are starting to believe that the dollar is on an upwards trajectory.

Euro struggling but reacting to the Dollar index

Since the single currency makes up more than half of the dollar index it is obvious that no matter the sentiment towards it, the euro will always show a reaction to strength or weakness for the greenback.

So it proved yesterday, with the euro falling to a recent low only to recover as the dollar suffered a bout of profit taking late in the day. It fell to a low of 1.1192 but closed back above the 1.1220 support level at 1.1227.

There is little in the way of economic information being released this week although next week will be highly significant. Sentiment indexes for April will be released on Monday and Eurozone-wide Q1 GDP on Tuesday.

Traders are still unsure about whether the economy will have contracted in Q1 with current estimates expecting growth between flat and a 0.2% increase. The size of the number is hardly significant, but the difference between -0.1% and +0.1% is a chasm in terms of confidence and global perception.

Before the euro steps into the limelight next week, it is likely to continue to shadow the dollar which has plenty of drivers as company results continue and Q1 GDP is released tomorrow.

One further upcoming driver for the single currency will be how opinion polls rate the chances of Federalists versus Nationalists at next month’s elections. So far it appears those in favour of an expanded EU both in terms of makeup and administration are just ahead.

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.”