27 Mar 2019: Sterling awaits definitive Brexit plan

Sterling awaits definitive Brexit plan

March 27th: Highlights

  • MPs to vote on a series of non-binding alternatives
  • Weaker than expected U.S. data supports Fed stance
  • Market sentiment drives traders to sell the euro into any short-term bounce

Traders wary of pushing the pound too far in either direction

It appears that even the foreign exchange market is becoming weary of the continued uncertainty and inability of Parliament to decide on a plan for Brexit and the post-departure landscape for the UK.

Having wrested the process away from the Prime Minister, MPs are about to start voting on a series of non-binding proposals. These range from acceptance of the current Withdrawal Agreement (which is apparently gaining support) to abandoning Article Fifty all together and several other proposals in between.

There are two major flaws to MPs taking control of the process; first, any vote in favour of the proposals does not have to be accepted by the Government and, second, Brussels has hinted that it is only dealing with Her Majesty’s Government and usurping of the process by MP’s will not be acceptable to them.

There are rumours that several Brexiteers are contemplating supporting Mrs Mays proposals should the third vote take place, but the DUP continue to be against which would mean that for it to pass there would need “defections” from opposition MPs for it to pass.

The pound reflects trader’s sentiment over the continued uncertainty, unable to gain a foothold to move higher, but also supported by commercial buyers on any weakness. Yesterday, it traded in a 1.3263/1.3157 range, closing virtually unchanged on the day at 1.3207.

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Dollar reacting to data as Feds actions resonate

President Trump’s break from tradition by appointing a Fed Chairman from outside the normal field of economics is having an unexpected effect on the Central Bank and its relationship with the market.

Having tested the market’s appetite for a “normalization” of monetary policy and found that traders were prepared to accept a counter-balance to the President’s tax cuts and infrastructure investment using more borrowed money, Jerome Powell has now demonstrated a more conservative side more befitting his legal background. The Fed’s greater data-dependency is being appreciated by the market as the data backs his approach.

Yesterday data for the housing market showed a softening of one of the more basic and transparent parts of the growth picture. Data for housing starts in February showed an 8.7% fall from January, which can be considered weather-related, although the fall was not as severe as the market had feared. House prices rises also dipped in February, climbing by 3.6% following a 4% increase in January.

The dollar index is ending the quarter on the front foot following a mixed Q1. It rallied to a high of 96.84 yesterday, closing within two pips of the high. It has continued to rally overnight reaching a fresh high of 96.93.

Euro struggling with market sentiment

The recession is coming! Market sentiment is a strong driver of the market in the absence of any concrete data to back any change in traders’ views. Right now, the single currency is mired in a downward spiral where any positivity is seen as a “blip” while poor data is treated as a confirmation of worse to come.

Recent data from Germany is a case in point. The truly awful data for manufacturing activity was confirmation that if Germany isn’t already in recession, the economy will soon confirm market expectation. However, better than expected data from the well-respected IFO institute released on Monday showed that things may not be as bad as had been feared. This more positive outlook was largely disregarded and treated as an “outlier”.

The market is looking to the ECB to provide a plan for the Eurozone to escape the clutches of the current downturn before it turns into a long and damaging recession.

Despite claims to the contrary, the “cupboard is bare” when it comes to tools for providing greater accommodation and more stimulus to aid growth.

The lack of a fiscal mandate means that tax cuts for the entire region cannot be achieved and illustrates perfectly the crossroads at which the Eurozone finds itself. It has been so embroiled in Brexit over the past few years that it has been unable to find time to discuss plans for greater integration which is clearly needed if the “Grand Experiment” is to succeed.

Market sentiment continues to count against the single currency which is unable to gain any kind of foothold to advance. It continues to mirror the dollar and there are large sell orders building up to halt any rally. Yesterday, it fell to a low of 1.1263 and closed just a few pips above the low.

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.”