24 Dec 2018: Trump overstepping his authority?

Trump overstepping his authority?

December 24th: Highlights

  • Rumours spread of plans to remove Fed Chairman
  • No Deal Brexit fast becoming the base case
  • Short-term versus long-term interests clash over the euro

Trump considering removal of Fed Chair

The independence of Central Banks globally, not just in the U.S., may be under threat if the rumours that President Trump is considering ways in which he may legally remove the Chairman of the Federal Reserve from office are true. No matter the type of Government in power in any given nation, the independence of the Central Bank is sacrosanct and one of the most significant columns on which the global economy is built.

The financial wellbeing of any nation is deliberately kept out of the hands of politicians and is, generally, in the safekeeping of the Central Bank who, being independent of elected officials with varying policy outlooks, are charged with maintaining growth and inflation within well-publicized bands.

President Trump has said on many occasions that the level of the Dow Jones Industrial Average is a useful barometer of his Presidency. Given that the index fell by 7% last week, has now fallen 18% from its year’s high and is close to 10% down in 2018, little further comment is necessary.

The dollar index rallied strongly on Friday closing at 97.02 just three pips from its high on the day. As liquidity falls as the holidays begin, any confirmation of the President’s intentions may see a violent reaction from the market.

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Leadsom confirms no deal the default position

Andrea Leadsom is the Leader of the U.K. House of Commons, the Minister responsible for arranging the business of Parliament. She was quoted over the weekend as commenting that a no deal Brexit, despite not having a majority of support in the House of Commons, is the Country’s default position if there is no agreement reached by 29th March next year.

The only item of certainty in the Brexit morass is that the UK will leave the EU on that date.

Given the fact that Brussels is firm in its commitment to the existing deal, insisting that there will be no further negotiation and that that deal stands virtually no chance of being adopted by Parliament, no-deal is fast becoming the most likely scenario.

With just 81 days to go once Parliament reconvenes on January 7th, very little time will be available for any further discussion, let alone a fresh set of proposals. With both sides of the argument firmly entrenched with the old “no deal better than a bad deal” mantra starting to re-emerge from the Brexiteer side while remain continues to trot out the “revoke article fifty” rhetoric, there is very little space for the middle ground. It is incredible to think that with less than three months to go; the type of Brexit the UK desires never mind how it will be implemented has still yet to be decided.

The pound remained in its recent narrow range on Friday as market activity continued to slow. It reached a low of 1.2617 versus the dollar closing at 1.2626.

Euro remains an enigma

It is not easy to trade the single currency successfully. The number of factors that affect its level against other currencies is often overshadowed by the performance of those other currencies or the significant weighting it has in the dollar index.

While it is the clear desire of the EU Commission to have the euro considered a global reserve currency since liquidity in the market easily rivals that of the dollar it is unlikely to receive that status since the window of opportunity is narrowing with the rise of the Chinese currency to greater prominence despite global concerns over the independence of the Yuan from Government policy.

The ECB policy of considered and accurate advance guidance which this year centered around the winding down of the Asset Purchase Scheme and benign neglect of short-term interest rates has taken away volatility. The Central Bank’s default position is well known and the market can afford to be data-driven, understanding that nothing will change provided economic activity remains positive and inflation controlled.

On Friday the single currency fell despite an air of relief over the deal reached between Rome and Brussels over the Italian budget deficit, even if it is considered by most to be a fudge with the real battles still to be fought. It reached a low of 1.1355 and closed very close to that level, driven by the rally in the dollar index.

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.”