27 April 2023: Brexit: not the boon that was expected

27 April 2023: Brexit: not the boon that was expected


  • Pay growth rising more quickly than expected
  • Freight slowdown another pointer towards recession
  • Lagarde believes the dollar’s reserve status should not be taken for granted
GBP – Market Commentary

Calls begin for a Public Enquiry

It is generally accepted that if a vote on Brexit were conducted now there would be an overwhelming win for remain.

This is more a testimony to the aggressive tactics used by leave campaigners at the time, compared to the underwhelming performance of remain.

Of course, there have been factors outside Brexit that have affected the economy since the country left the European Union, not least the pandemic, which to be fair, notwithstanding partygate, and other Boris Johnson related issues, the country handled fairly well.

The Pandemic should be viewed like a war. No one in Government had experienced anything like it before and decisions were made semi-blind, with little or no guarantee of success.

Brexiteers used jingoistic language, playing on people’s mistrust of European characteristics, which were an overhang of long since ended views.

Although in the modern day, there are significant issues with bureaucracy within the Union, and it takes an inordinate amount of time to get anything done, purely from a trading partnership perspective, it has been pretty much proved that it is better to be inside looking out, than outside looking in.

The Government has not capitalized on the freedom to trade within new markets, while the country’s membership of the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) has potential it will be far from the instant benefit some believe it to be.

The fall in the value of the pound against the euro from around 1.40 to today’s level of 1.13, is something of an indication of the market’s view on the Brexit decision.

Although the UK is now free to take advantage of unencumbered decision-making, free from the tangle of bureaucracy that Brussels brings, it is in many ways attached to Europe in more than geographical terms.

The response to both the Pandemic and the Russian invasion of Ukraine have, of necessity, needed the coordination of Brussels and London.

In the area of air travel, the CEO of Ryanair, one of the most pan-European businesses, sees the UK having to consider having a Swiss-style agreement with the EU in which it pays into the Budget in exchange for membership of the single market, within ten to fifteen years.

The jury is still out over Brexit membership, and it will be interesting to see how the country’s relationship with Brussels, and Paris, Frankfurt, Madrid and Rome, if as predicted there is a change of Government in a little more than eighteen months.

Yesterday, Sterling clawed back most of the losses it had made this week. It rose to a high of 1.2515, although it drifted back to close at 1.2469.

USD – Market Commentary

Data remains unpredictable

The publication of durable goods orders, which is an indication of the confidence of the economy to invest in long-term purchases of capital goods, yesterday received a welcome boost from Boeing which is one of the major contributors to the data.

Airlines have to plan long in advance given the lead-in time from orders being placed to delivery.

Durable goods orders jumped by a considerable 3.2% in March. However, if transportation, basically cars, ships and planes, were removed, investment in capital goods by industry was a paltry 0.3%.

This gave even more ammunition to doom-mongers who continue to predict a longer-term downturn for the economy and possibly a recession.

Orders for passenger aircraft jumped 78% in March after two consecutive monthly declines. This is not unusual, given that Boeing, America’s only significant passenger aircraft builder, is in almost constant negotiation with airlines, and it can take a significant time for them to push the button on orders, given the effect of a miscalculation of economic events.

Commentators see the overall economy falling into a slump after a number of years of rapid growth.

A further indicator of a slowing economy is a freight recession, that is seeing fewer trucks delivering goods across the country. The most obvious indicator of this is the American Trucking Index which has fallen to its lowest level since the middle of 2021. The cost of diesel fuel has fallen by close to 50% since last year.

There are several small indicators which are melding into one that are adding to fears that the economy is slowing rapidly.

The actions of the Federal Reserve have become more critical of late as rates become restrictive on demand. Having risen from almost zero and now expected to touch 5% next month, they have gone from neutral to restrictive quickly.

Jerome Powell, the Fed. Chairman, remains hawkish over inflation, but several colleagues who make up the FOMC see room for a pause after the May meeting.

The dollar came close to testing its low for the year as speculation grew that the Fed may even decide to pause rate hikes immediately.

It fell to a low of 101.01, but bounced off its support at that level to close at 101.44

EUR – Market Commentary

Central Bank actions about to decouple

The Governor of the Slovenian Central Bank spoke yesterday about how the ECB has no choice but to continue to hike interest rates given the rate at which inflation is falling.

Slovenia is a member of the Eurozone but as with the other eighteen members is able to influence its economy via fiscal policy. It is also one of the nations that is teetering on the edge of a recession and despite recently declaring that its property market is overheating, announced measures this week to add more stimulus to counteract the downturn in economic activity.

In Spain, the OECD has confirmed that real wages fell by 5.3% in 2022, the largest fall in the Eurozone. Wages grew on average by 2.8% leaving a significant hole in the budgeting abilities of the average Spaniard.

Even the return of tourism has been slow to stimulate the country with both Britons and Germans, the two main contributors preferring staycations last year.

It is hoped that there will be a return to pre-Pandemic levels this year.

The IMF recently warned the ECB about accepting its bank’s own data regarding the risk they are holding within their own balance sheets. A major review is taking place to ensure that the Central Bank is not surprised by similar issues that brought about the collapse of Silicon Valley Bank.

There appears to be an issue with unrealized losses on banks bond portfolios which highlights a regulatory loophole. The effect of tightening regulation may see banks have to realize losses that will weaken their capital positions that had only just reached a level that is acceptable to the ECB.

There is expected to be a decoupling of G7 Central Bank monetary policy before the end of the current quarter.

Although speculation is mounting that the ECB may temper its aggressive attitude to hiking interest rates soon, the Fed and Bank of England are on the point of ending tighter monetary policy.

This will likely have a resounding effect on the currency market, with the euro already showing signs of continuing strength.

Yesterday, the single currency reached its highest level since the end of March last year. It rose to a high of 1.1095 and closed at 1.1042. Having seemingly broken above the important 1.10 significantly, traders may feel more confident in adding to long positions.

Have a great day!

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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.