Carney Breaks Brexit Silence
Morning mid-market rates – The majors
May 25th: Highlights
- BoE Governor voices concerns over disruptive Brexit
- Trump calls off N. Korea talks; Blames China
- Potential Eurozone slowdown affecting single currency
Lack of Brexit progress concerns Central Bank
Carney sees the role of the Bank of England as the entity that creates a monetary environment for UK recovery after the decisions are made. Yesterday, that changed as Carney felt able to open-up on his fears over the way the negotiations are developing. In a speech he made it clear that the Bank was ready to act in “whatever way is necessary” to support jobs and economic growth. He is clearly concerned about the direction the talks are taking, the pace at which decisions are being made and the possibility of a “disorderly Brexit”.
The pound initially rose to a high of 1.3422 but was unable to sustain its gains following Carney’s speech and closed a little lower at 1.3381. It has continued to lose ground overnight, although ranges have been very tight. The pound has been more volatile versus the euro recently as both currencies have had major, sometimes conflicting, drivers. Yesterday, the pound traded in a 1.1444 to 1.1393 range, closing at 1.1418
Carneys decision to enter the Brexit debate demonstrates his concern that the Bank of England does not have the tools to deal with a substantial downturn which would start from a far lower base than what was seen ion 2008/9.
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Trump outwitted by China, twice.
In trade talks undertaken by Treasury Secretary Steve Mnuchin but clearly guided by the President, the administration felt no need to make any form of concession so when China reminded Mnuchin of how the game has changed since its emergence from decades of isolation, the talks were immediately placed “on hold”.
Yesterday, the President called off the summit with North Korean leader Kim Jong-un which were scheduled for a couple of weeks’ time as he was concerned that Pyongyang had not complied with a demand to halt nuclear development. North Korea has gained a significantly from the recent apparent thaw in relations with the U.S. It is now being considered as a nuclear power, otherwise why would the U.S. Prsident concern himself? So sees itself as able, clearly influenced by Beijing, to start to dictate terms.
The dollar index is showing signs of topping out at the same level it did five months ago as risk appetite is affected by these foreign policy fails. Yesterday it reached a low of 93.60 but has rallied a little overnight trading back up to 93.93. The outlook for the dollar is becoming more clouded as a dovish Fed. considers its
Eurozone slowing as activity levels off.
With growth at the low end of expectations and activity indexes starting to falter, Draghi’s words are now starting to be accepted as a more cogent view on the prospects for the economy.
Brexit has barely been a factor in the Eurozone, being considered a uniquely British issue but there is little doubt that the Eurozone economy will suffer. The latest estimate is that it will reduce GDP by between 0.2% and 0.4% in the short term.
The fall in the euro over the past month has been driven by several factors each of which is not yet settled and with the economy likely to drive concerns going forward continued instability is to be expected.
The ECB has a growing reputation for caution that but in Sr. Draghi’s case that sense of caution is more a case of consideration of what could be the most appropriate course of action. His conclusion is to stand fast and consider further. The jury remains out on whether that stance is likely to prove correct
Yesterday, the euro traded in a 1.1751/1.1690 range having given up a lot of ground in the previous session. Overnight it has remained in a narrow range making a low of 1.1708
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.”