26 September 2019: Parliament places Brexit in limbo

26 September 2019: Parliament places Brexit in limbo

Parliament places Brexit in limbo

September 26th: Highlights

  • Johnson defiant over Parliamentary suspension
  • Dollar reacts positively to risk aversion
  • Euro falls as market considers recession

Johnson still outwardly confident of Brexit deal

Far from being chastened by the experience of finding that his suspension of Parliament was considered illegal, Boris Johnson came out fighting as he returned to the UK following his visit to New York.

Johnson commented that although he accepted the verdict of the High Court, he disagreed with it. He faced criticism from the Opposition for his actions although he gave as good as he got, labelling the Labour Party as cowards for not following through on their almost constant demands over the past two years for a General Election.

The opposition parties are in the almost unique position of being in control of the Parliamentary agenda and are thoroughly enjoying the experience. The demand that a no-deal Brexit is removed from the table before they agree to a General Election is being heavily criticized by Conservative MPs. The Attorney General (the Government’s legal expert) labelled Parliament as being “dead as dead can be”.

As the blame game re-emerged, Johnson was on the warpath later in the day, vehemently accusing the Bill that was passed which, theoretically, forces him to request an extension to the Brexit deadline of considerably weakening the UK’s bargaining position. He named the Bill the “The Surrender Act” and “the Capitulation Bill”.

While Brexit remains the only topic being discussed in Parliament, for at least the next five or six weeks, the usual business of Parliament remains in abeyance with all the ramifications such a situation brings.

The pound remains driven by every nuance of the debate although, thankfully, liquidity remains plentiful.

Yesterday, it fell to a low of 1.2346 as the “Brexit paralysis” continued, although part of the move was due to a strengthening dollar. It closed at 1.2350.

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Greenback moving higher driven by several positives

Despite having seen interest rates cut at the last two meetings of the FOMC, the market is still willing to buy the dollar, driven by several varying degrees of positivity.

The dollar will always be a safe-haven currency while it holds such a dominant position, unchallenged as the global reserve currency. Other currencies, most prominently the euro and Chinese Yuan have been promoted but suffer from a lack of support.

The single currency is not yet sufficiently mature particularly given the lack of a single fiscal policy and the Yuan is both far too controlled by the state and subject to manipulation. It will be many years before either currency is able to challenge the dollar’s pre-eminent position.

Added to the dollar’s safe-haven status, the news of progress in trade talks between Washington and Beijing is positive together with the risk of the President being impeached fading are having a positive effect.
Despite the President constantly railing against dollar strength and its effect on the competitiveness of U.S. exports there’s very little that the FOMC can do given that inflation is starting to pick up. This will be evidenced by the likely rise in Personal Consumption Expenditures, the Fed’s preferred measure of inflation, which will be published tomorrow.

The jury is still out on the state of the economy with the Fed adding to the current uncertainty with FOMC members making ambiguous statements and acting reactively. Far from driving the economy, the Fed is open to accusations that it is far too reactive to events. Such tactics could leave the Central Bank well “behind the curve” should more significant action be required.

Yesterday, the dollar index reached a high of 99.06, closing at 99.04. The reasons listed above for a stronger dollar are complemented by issues being faced by both the single currency and Sterling which make up more than two-thirds of the index.

Euro continues in a downtrend

In contrast to the dollar which appears to be “flavour of the month” again (at least for now), the euro is considered a “patient in intensive care with physicians scratching their heads about any remedy as nothing seems to be working”.

It is becoming more obvious with every passing month in which the economy deteriorates that the problems with the Eurozone are structural. Despite taking a decade to create and introduce monetary union, it is almost as if the entire process, which took place more than twenty years ago, has been fatally flawed from the start.

Although lip-service has been paid to the lack of cohesive and unified fiscal and social welfare policies, it has taken the most recent downturn to bring those issues “bubbling to the surface”.

It may be that it is too late for the necessary changes to be made with several countries, mostly those with significant economic issues, unlikely to support wholesale changes to how fiscal policy is decided throughout the region. It will require significant changes to the growth and stability pact and the seemingly draconian controls upon the region’s debt to GDP ratios and budget deficits to bring them round.

Given the fractured state of the European Parliament, the changes coming to the incumbents in senior roles across the region and the parlous state of the economy, together with the overhang from Brexit, it may be some time before even a meaningful discussion can take place.

Meanwhile, the economy continues its seemingly headlong rush into recession. Even the pace of the decline is picking up again. And traders will be eager to see the first cut of Q3 GDP when it is released towards the end of next month.

Next week the euro will undoubtedly be pressured by further data releases from Germany.

Yesterday, it fell to a low of 1.0937, closing at 1.0951.

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.”