24 September 2019: Sterling lower on no Brexit progress

24 September 2019: Sterling lower on no Brexit progress

Sterling lower on no Brexit progress

September 24th: Highlights

  • Supreme Court about to rule on Suspension of Parliament
  • Germany leading Eurozone into recession
  • Trade talks making slow, if any, progress

Court ruling due this morning

The High Court Decision on whether Boris Johnson legally suspended Parliament and whether he misled the Queen in order to obtain her approval is due to be published at 10.30 (BST) this morning.

While this is largely a “technicality” it could have far-reaching consequences in many directions. First, there will be calls for Johnson to resign. Although he would resist, his support would be severely tested. A decision would need to be made about when Parliament could/would be recalled. With the Opposition Labour Party Conference in full swing and the Conservative Party starting theirs this weekend, the first practical date for recall would be October 7th, just one week earlier than had been scheduled.

At its Conference yesterday, the Labour Party demonstrated perfectly why many people still see it as “unfit to Govern”. Faced with a decision on whether to officially support a campaign to remain in the EU at the coming General Election it decided to back its Leaders’ policy of “fence-sitting” pending the election result.

It is still Brexit that dominates the direction of Sterling in financial markets. Yesterday, as talks apparently progressed, the pound fell back on rumours that Ireland is dissatisfied with the arrangements being suggested for the alternative to the “Backstop”.

The Prime Minister, in New York for the UN General Assembly, will meet several senior EU Heads of State to continue negotiations.

This may be a more fruitful avenue for Johnson since Angela Merkel, Emmanuel Macron and their colleagues will be far more concerned that “Bureaucrats from Brussels” over the economic effect of the UK’s departure from the EU with no deal which Johnson continues to threaten. This is despite Parliament passing a law under which if no deal is agreed at the EU summit, he must request an extension to the departure date.

Yesterday, the pound fell to a low of 1.2412 versus the dollar, closing at 1.2430. It remains volatile in a narrow range as traders await more concrete evidence of any progress in Brexit negotiations.

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Abysmal German data signals recession

Any market expectation that the Eurozone economy is “bottoming out” was shattered spectacularly yesterday as data for German manufacturing data was released. The data showed that the output, far from marginally recovering, fell to a new low.

The German data “rolled-up” into dismal data for the entire region with manufacturing output falling from 47 in August to 45.6 in September.

Overall output which includes both Manufacturing and Services remained just about in expansion territory, falling to 50.4 from 51.9. Services had been the single sector which had held recession in the region at bay, but all signs now point to a continued slowdown through the winter.

ECB President Mario Draghi saw his hopes that the new measures that have been taken would improve things dashed. He commented that a “persistent slowdown in manufacturing risks affecting the rest of the economy”.

The market took his comments to mean that a recession is coming and sold the single currency down through the psychologically important 1.10 level versus the dollar. Following its most recent action, the ECB now seems powerless in the face of economic turmoil to arrest the slide in both activity and the value of the currency.

Yesterday, the euro fell to a low of 1.0966, closing, following some profit-taking on short-term positions, at 1.0993. The outlook for the euro remains weak with the next technical target at 1.0840 which was last seen in May 2017.

Trade rumours driving dollar activity

Over the past few weeks, there have been rumours regarding the ongoing trade talks between Washington and Beijing that have been as wide-ranging as “the talks are about to collapse” to “a draft agreement is in place with just the details to be decided”.

The truth of the matter is clearly somewhere between these two extremes and with very little hard evidence to work with, the market is making its own mind up as it is wont to do.

The dollar’s gains yesterday had more to do with the appalling data released in the Eurozone than any positivity towards the greenback.

The release of activity data for the U.S. was a little better than seen in Europe but hardly significantly so. Employment in the powerful services sector fell to its lowest level in almost ten years as output hovered close to the line between contraction and expansion.

Manufacturing output rose a little but not by a sufficient margin to convince the market that the FOMC has finished with its “mid-cycle” adjustments to interest rates and monetary policy.

With the unemployment report for September on the horizon, market expectations are already turning mildly positive. Preliminary expectations are for around 170k new jobs to have been created although that estimate is sure to change in the coming ten days or so.

Yesterday, the dollar index rose to a high of 98.84 but drifted back to close at 98.63.

Data for consumer confidence and house prices will be released later today. These are both “second-tier” pieces of data and it would take a major surprise for them to have any effect on the currency.

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.”