Brexit or MPC?
24th January: Highlights
- Positive data week puts MPC comments in context
- Dollar rally based upon dovish ECB
- Strategic review designed to hide bigger issues
Next week is the week the country has waited for for three and a half years
Unfortunately, not only is the departure from the EU a soft departure, the real work will now begin. Ursula von der Leyen, the new President of the EU commission was conciliatory in her remarks earlier in the week saying that a trade agreement is eminently possible by the end of the year, provided the UK “plays ball”.
Furthermore the U.S. Treasury Secretary Steve Mnuchin speaking at the World Economic Forum in Davos sees the U.S. completing trade deals with both the UK and EU this year.
Twenty-four hours is clearly a long time in international diplomacy. The previous day, Mnuchin had been threatening the trade deal with the UK over the UK’s threat to tax tech firms on their turnover in the country.
Mnuchin commented that the matter would be discussed by Boris Johnson and Donald Trump. This has clearly happened, since Mnuchin was far accommodating yesterday.
The global financial markets are becoming more and more driven by trade. This will suit the UK as it embarks on its new adventure free from EU regulations but there are sure to be several “bumps in the road” as free trade agreements are agreed with the major nations.
Yesterday, the pound rallied against the euro but was more mixed versus the dollar. Against the single currency, it rose to a high for the year at 1.1881, closing at 1.1867. Against the dollar the picture was less clear. It made a high of 103152 but overbought conditions technically saw it close at 1.3120
Activity data unlikely to drive the FOMC off course
Fed-watchers will be excited to hear what Jerome Powell has to say next week but the traders will be more interested in when the Central bank will be likely to affect markets again in any direction.
Volatility is the lifeblood of trading activity while it is the Central Bank’s job to create stable conditions in which growth can be managed and inflation controlled.
Concerns over the Coronavirus outbreak China have fed through into a little risk aversion but until the situation becomes clearer, there is unlikely to be any significant reaction.
It is doubtful whether today’s manufacturing and services Purchasing Managers indexes will cause any significant movement in the market. Manufacturing is expected to be marginally higher at 52.5 from 52.4 and services at 52.9 from 52.8. It doesn’t take a genius to figure the effect on the composite index.
Yesterday, the dollar index reacted to the weakness of the euro, rising to a high of 97.80, closing at 97.68.
With two weeks until the next employment report and the FOMC unlikely to provide any major surprises, a period of consolidation is the most likely course for the dollar next week although there are still one or two imponderables that could see the markets react.
No stone to be left unturned
Let’s get the boring stuff out of the way. Interest rates were left unchanged at the ECB meeting yesterday as Ms Lagarde commented that there needs to be a sense of realism and she, for one, cannot yet see the green shoots of a recovery.
Despite aggressive stimulus measures initiated by Ms Lagarde’s predecessor, Mario Draghi, the ECB has constantly fallen so short of the inflation target that the target is possibly going to be done away with as technically redundant.
The strategic review announced at Ms. Lagarde’s press conference will investigate the tools that the Central Bank has at its disposal and how they have been used. It will hardly take the projected time scale of almost a year to see that the ECB needs to be helped by a looser growth and stability pact coupled with fiscal union.
With the Eurozone predicted to grow at a slower rate than the UK this year and next according to the IMF, the negotiations over a trade deal may suddenly become more vital to Ms von der Leyen than they are to Mr. Johnson.
The euro fell to a low of 1.1036, closing at 1.1057 as the support at 1.01080 was conclusively broken.
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.”