No end in sight

The interminable wait for a settlement of the UK’s divorce from the EU goes on. The pound is being whipsawed by rumours which continually fail to be substantiated leaving it in a constant state of flux.

With a dearth of economic information to provide at least a little interest outside Brexit, the market is playing ever narrower ranges with traders unwilling to commit to a position for any length of time.

A rumour that Brussels was going to offer the UK a Britain-wide customs deal pushed the pound above the 1.3000 level versus the dollar and it briefly touched a high of 1.3054. To see that as a positive since the British Government has already ruled out the UK being part of any customs union going forward didn’t deter a bout of buying which soon faded as it became clear that no such offer was close to being made.

The downside for the pound is mostly protected by nervous short positions looking to take profit as there is unlikely to be any fresh selling ahead of today’s House of Commons vote where the DUP has vowed to side with rebel Conservative MP’s to make any backstop deal unworkable and potentially illegal.

The pound faded late in the day breaking back below 1.3000 reaching a low of 1.2970 before closing at 1.2985. Earlier in the day, it had traded as low as 1.2937 before the rumours began.

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Market awaits Brussels decision on Italian Budget

The single currency traded in a narrow 1.1494/1.1439 range yesterday as traders await the outcome of Brussels discussions concerning the Italian budget. While it is hard to see any sanctions immediately being placed upon Rome in the current environment, the EU will need to express its displeasure in no uncertain terms to discourage other nations from flouting budget and debt rules.

The European Commission will demand that Rome rewrite its budget plans under threat of financial sanctions “down the road”. The Italian press has already said that it is unlikely that the coalition will back down which will lead to further turmoil that can only hurt the common currency towards the end of the year.

Brussels sees its hands as tied on this issue and feels that there is no other option than to risk stirring the flames of nationalism in Rome to keep the wider Eurozone’s financial house in order.

While Italy has mostly run a budget surplus since the introduction of the euro, the new direction being taken by the coalition could mean a return to the dark days faced by the pre-euro Lira.

The ECB is also meeting this week to discuss monetary policy and while inflation growth and industrial activity remain “in the green” any change in monetary policy is out of the question. However, a slowdown of the withdrawal of the Asset Purchase Scheme is a possibility as there is no hard and fast rule as to how quickly the withdrawal will be completed now that it has begun and this may provide stimulus to the economy and support to Italian Government debt.

Dollar driven by geopolitical issues

In the past, there had always been an interesting theoretical economic argument that the dollar’s dual role as a global reserve and national currency of a single country causes distortions.

This is as true now as it has been for some time with the U.S. embroiled in several geopolitical issues which detract from the strength of the U.S. economy and the fact that the interest rate differential between the U.S. and other G7 nations is widening almost monthly.

This has been a tumultuous year so far with North Korea, Trade, Iran sanctions, Khashoggi, Turkey, and Russia all contributing to a greater or lesser extent to the dollar’s path. Risk appetite has been difficult to gauge with emerging markets coming close to collapse driven by the U.S. sanctions on Turkey and the hyperinflation seen by Venezuela.

With midterm elections a little over a week away, the dollar’s direction won’t get any easier to predict since it remains to be seen just how the Republicans will perform. They currently control both houses of Congress but have still failed even then to pass several key pieces of legislation.

Yesterday, the dollar index traded in a narrow 96.16/95.80 range as traders remained shy of becoming too involved ahead of the elections which take place on November 6th.