Economy, Italy and the future concern of Draghi

ECB President Mario Draghi, not known for his effusive personality, as befits a Central Banker, gave one of his more downbeat appraisals of the Eurozone yesterday. He confirmed that interest rates would remain unchanged but also said that the Asset Purchase Scheme would be halved to Eur 15 billion per month with the continued objective of it ending completely by the end of the year.

He gave himself an option for it remain in place longer as he declined to confirm that year-end was a firm end date.

Eurozone-wide data releases have been weaker than he would have hoped for at this stage of the cycle with PMI’s, released earlier in the week falling by more than market expectation. Draghi simply commented that “incoming information is somewhat weaker than expected”

His abiding concern which he only briefly alluded to when speaking about the risks facing the entire region, is Italy.

Brussels has officially rejected Rome’s 2019 budget, calling it a conscious and open effort to go against its commitments. The Italian Government is unlikely to take much notice and will press forward with its plans which, it says, “put Italians first.”

Rome now has three weeks to prepare a new budget, but it is more likely that the market has three weeks to wait before a further clash between the two sides.

The single currency continued its recent fall yesterday although the pace of the fall slowed a little. It reached a low of 1.1356 versus the dollar still managing to remain above its year’s low.

Sr. Draghi alluded to his concern over Italy by commenting that monetary policy will be impossible to manage without fiscal responsibility being taken by the individual members of the Eurozone.

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Sterling lower as no deal becoming accepted

It seems that the idea of a no deal Brexit is becoming the more likely endpoint for the negotiations between the UK and EU. There will not be any official acknowledgment of that, but with an obvious halt in the negotiations, the Irish Border and the backstop have created a seemingly insoluble impasse.

Negotiations are probably still going on behind the scenes but the major players on each side seem to have retreated. With both sides waiting for the other to come up with a new proposal, we could have a long frosty winter ahead.

Market acceptance of the bleak outlook saw the pound continued to fall yesterday versus both the dollar and euro. Versus the greenback, it fell to 1.2797 while against a weak euro it fell to 1.1257 closing at 1.1276.

The brief rally brought about by Mrs. May’s survival following her speech on Wednesday evening has faded. However, the market is extremely oversold, and any further significant fall may require a rally to remove the weakest positions before continuing.

Dollar rally continues as market awaits fresh drivers

There has been no particular reaction by the dollar to the spate of explosive devices sent to American politicians and the media over the past forty-eight hours. Prominent figures including the President have condemned the incidents and praised the work of the security forces.

The dollar index continues to threaten its year’s high, reaching 96.74 with risk appetite and the weakness of other G7 currencies remaining the most significant drivers.

President Trump continues to exude confidence about the midterm elections although he has very little upside and some serious potential downside if things go badly.

While no one is voting for the President this time around, the elections are seen as a vote of confidence (or otherwise) in his performance.

Analysts believe that there is an 85% chance that the Democrat Party will win enough seats to take control of the House of Representatives. The Senate could still go either way, although the Democrats are only given a 22% chance of turning over control.

By the time of the elections, the President will have attended 30 election rallies, hardly the actions of a quietly confident man. It remains to be seen just how much the political map will change but with the economy growing (as will be seen later today when Q3 GDP is released) and interest rate differentials on the rise, the dollar is unlikely to fall too far.