27 August 2019: Market awaits Parliament’s return

Market awaits Parliament’s return

August 27th: Highlights

  • Johnson detects “subtle shift” in European position
  • Germany likely to act to improve economy
  • Dollar recovers as Washington and Beijing cool trade hostility

Brexit remains the only game in town

At the risk of dredging up an old headline, the UK’s departure from the EU, no matter how it happens, is the only issue currently influencing the value of the pound.

Although Boris Johnson exudes confidence and continues to make bullish comments about the chances of a deal being struck, traders remain conflicted about how serious Brussels is about “playing ball”.

Johnson wants the Withdrawal Agreement torn up and any reference to the Irish Backstop to be absent from any new deal. Brussels meanwhile needs to have its member protected and the integrity of the single market maintained.

While this is seemingly the same stalemate that has existed throughout 2019, there is a clear change in mood from both London (where Johnson is prepared to provide an alternative and is working to provide one), and Brussels where, in the shape of Angela Merkel, the EU is at least prepared to listen to alternatives.

At the closing of the G7 summit over the weekend, Johnson was at pains to make it clear that the UK is fully prepared to leave on 31st October with no deal and if that happens the divorce payment will be withheld. One further change in attitude that has been obvious is that the EU respects Johnson as a politician and believes the seriousness of his intent.

In a holiday-thinned market, Sterling maintained its recent positivity only falling slightly against a stronger dollar. It reached a low of 1.2207, closing at 1.2216.

It now remains to be seen just how Parliament will view the new talks taking place between London and Brussels when it reconvenes. It is less likely that Government MPs will back any plan to oust Johnson while there he is still able to pull a Brexit rabbit from his hat.

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Germany to grasp the nettle?

While there has been a great deal of hand wringing at one Central Bank Headquarters in Frankfurt, the other is ready to come up with a plan to save both its national economy and contribute to a recovery for the entire Eurozone.

Hand in hand with the Bundestag, the Bundesbank is working to put together a programme to cut taxes to boost the German economy. With the economy close to recession and activity and confidence levels nosediving, the German Administration is acting independently to improve its own economy.

While this is seen as being done within the framework of the European Debt and Stability Pact, other more heavily indebted nations appear ready to take their lead from Rome and defy Brussels to avoid a severe and long-lasting slowdown characterized by a recession.

In Italy, today is the deadline for a new Government to be formed before the President calls elections. Creating a coalition between the more moderate of the right-leaning partners in the coalition which collapsed last week and a centre-left group is seen as the only way that the country can avoid lurching further to the right and damaging the Union further.

If an election is called, Matteo Salvini and his Northern League Party will be clear favourites to win, using a manifesto which is sure to contain the threat of a new currency for domestic use, and possibly Italy’s departure from the Euro.

This would come close to bringing down the entire Eurozone and is something that Brussels will want to avoid at all costs.

Yesterday, the euro traded down to a low of 1.1094, closing at 1.1100 as the market awaits the outcome of coalition talks in Rome.

Washington puts the brakes on, and Beijing follows suit

While it is too soon to label it an outbreak of common sense, it seems that both the U.S. and China see the futility of their tit-for-tat measures taken to gain an upper hand in global trade.

While President Trump believes he inherited an issue that he is honour bound to correct, China is in no mood to relinquish the gains it has made both internationally and globally since its re-emergence.

With Trump adding tariffs at an alarming rate and Xi hitting on the idea of allowing the Yuan to depreciate to counteract the additional cost, this is a self-defeating prophecy for both sides.

It is obvious that there can be no winner and the collateral damage to the rest of the global economy is not a risk worth taking for either side.

President Trump, at the G7 meeting, was as forthright as ever but remains at odds with his partners over two crucial issues, namely Iran and climate change. A package of measures was agreed to help Amazonian countries, Brazil, in particular, over deforestation and the wildfires ravaging the region and Trump was conspicuous by his absence from the meeting. On Iran, President Macron of France has been trying to broker a solution and it was rumoured that

Trump will meet with the Iranian President in the coming weeks although there has been no official confirmation yet.

With the markets gaze firmly fixed upon the Federal Reserve, it may be that Trump will “hurry along” the economy by announcing further tax cuts. Were this to happen then the Fed’s rate cut last month would be the only one for a while.

Yesterday, the dollar recovered a little following its recent fall. It closed at 98.05, just three pips from its high on the day.

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.”