25 Mar 2019: Uncertainty rules as May pressured to go

Uncertainty rules as May pressured to go

March 25th: Highlights

  • All Brexit outcomes still possible
  • Dollar awaits FOMC meeting
  • Euro hit hard by German data

Brexit outcome still unknown

May’s Deal, no deal, a second (or people’s) referendum, a General Election or even the repeal of Article 50. It is easy to make a case for and against any of these permutations for the eventual outcome the UK’s almost certain departure from the European Union.

With Brussels remaining stoic in its insistence that the withdrawal Agreement that was agreed last December is the only deal available and Prime Minister May unable to secure backing for it, no deal remains the financial markets worst outcome.

With traders hoping for the best but fearing the worst, volatility for the pound has increased. The fact that Brussels gave two more weeks for a deal to be struck was treated as positive as the pound rallied to a high of 1.3224 versus the dollar on Friday before closing at 1.3209.

Reports in the weekend newspapers suggested that Mrs May could be forced to resign by her Cabinet colleagues. This will only add to uncertainty although in that event the market may wait to see who her replacement is before passing judgement. If Mrs May were to resign it would be difficult for the Cabinet to limit the process of replacing her to one of them since the wider Parliamentary Party would wish to “have a say”.

Were that to happen, pressure would grow for a vote of confidence in the Government, possibly followed by a General Election. In that event, a far longer extension would need to be requested with the UK almost certainly having to field Candidates in the upcoming European Parliamentary Elections.

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Market confidence in the Fed to be tested by data

The recent FOMC meeting, while expected to have a dovish tone, was considerably more than the market had been prepared for.

Abandoning any pretence at the normalization of monetary policy brought the outlook for growth and economic output into sharp focus. The most surprising aspect of Fed Chairman Jerome Powell’s comments was that they shocked a market that, while not seeing growth above 3% in the current quarter, was not expecting a significant slowdown to below 2%.

In the coming week, there will be several data releases that will put some “meat on the bones” of Fed expectation.

Building starts, house prices, consumer confidence, manufacturing indices and trade will all be released in the coming week. Only a fall in the trade deficit is likely to lighten the mood of the market, although that may be short-lived as news of progress (or lack thereof) in negotiations between the U.S. and China is expected before the end of the week.

As the first quarter comes to an end, the most obvious characteristic has been the lack of a clear pattern of activity. The dollar index has traded between 95.03 and 97.71 and is unlikely to move out of that range this week.

The dollar’s gradual recovery following a weak January was halted by the dovish reversal from the Fed.

The second quarter is likely to be dominated by politics and trade as the race for the 2020 election heats up and the position between China and the U.S. becomes clearer.

German activity horror story hits euro

While the ECB refuses to be swayed by economic data form individual nations, it cannot have escaped its notice that German manufacturing activity “fell off a cliff” in March. While French data was also weak, the fall from 47.6 to 44.7 for Germany was horrendous, even in the current climate.

The data had been expected to show continued contraction, but the size of the fall was unprecedented and means that if a recession in Germany is not already happening, it will be confirmed very soon.

Overall manufacturing activity data for the region fell to 47.6 from 49.3 while services activity was virtually unchanged at 52.7. The composite data showed that the economy is still expanding but at a slower rate.

Services activity tends to be less volatile than manufacturing and the fact that it is manufacturing that is suffering points to a longer than predicted slowdown and a recession, the depth of which is still the subject of speculation.

The single currency fell to a low of 1.1273 on Friday in the wake of the data but managed to recover to close just above 1.1300.

In the coming week, there will be speeches from ECB President Mario Draghi and Chief Economist Peter Praet as well as data on Eurozone-wide consumer confidence, business climate, and economic sentiment. The two speeches are likely to try to improve the sense of gloom in the region although the data is unlikely to provide a positive backdrop.

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.”