Sterling Rally Continues
February 28th: Highlights
- Markets no deal fears fading as EU accepts a possible delay
- Dovish Central Banks drive volatility lower
- Eurozone economic sentiment falls for the eighth month
Fracture between Brexit economics and Politics is growing
There has clearly been an incredible amount of horse-trading across the entire political spectrum which has thrown up several sets of strange bedfellows to allow Parliamentary possibilities to come about. First, the main opposition Labour Party is now fully supporting a second referendum despite that now being the least likely outcome. If the deal that Mrs May eventually presents to Parliament is rejected then MPs will get to vote on no deal or a delay in Brexit.
Despite there being no question of a second referendum, which means Brexit is still happening, at some point FX traders are sufficiently encouraged to abandon what has been the default “Brexit bad, no deal worse, but any delay hopeful” mantra that has been in place since Florence.
The pound’s rally continued yesterday, reaching 1.3351 and closing at 1.3304. While debate rolls on, the economic data coming from the UK has been encouraging although there have not been the peaks and troughs that have been seen in other G7 nations. Consumer confidence continues to fall but has been bolstered somewhat by the positive and widening gap between wages and prices.
February volatility fall concerns traders
The drop in volatility being seen across financial markets in February is a sure testament to the advance warning and continued fortitude of the FOMC in sticking to its planned approach.
The U.S. market, with its Capitalist roots, absolutely thrives on the one thing that markets generally rail against: volatility. Without a volatile market, traders find it difficult to make money which feeds through into just about every pore of the U.S. economy.
With the trade discussions between China and the U.S. continuing, Brexit likely to affect every part of the global economy, and Central Banks needing to “up their game”, traders are hopeful that the market will pick up as Q1 ends.
The interaction between currencies, where the dollar and single currency are simply mirroring each other, has never been more obvious and implied volatility is at multi-month lows. The fall in volatility and continuing low-interest rates will provide fuel to the global economy which will highlight output and performance differences driving volatility back up again.
Yesterday, the dollar index fell initially, reaching a low of 95.88 before rallying back to close at 96.17.
Euro bad news getting “less-bad”
Euro-area economic sentiment fell for the eighth month in a row in February data released yesterday showed. However, the fall was less than January and also less than market expectation.
That in itself is little cause for celebration but it may also be a negative for ECB action.
Members of the ECB Council have a propensity for seeing things as less negative as they are and also deciding to defer any positive action to provide stimulus. If next week’s ECB meeting refers to the “slowdown in the slowdown” as anything other than an opportunity to provide stimulation, the single currency could resume its recent path lower.
ECB President Mario Draghi last month referred to Brexit, a slowdown in China and rising protectionism as the major concerns facing the ECB.
As the Eurozone and, more generally, the EU are organisations built around globalization, any rise in protectionism is a major concern. As the U.S political landscape coming into sharper focus as Trump’s second election nears, the use of trade as a weapon will become a serious factor in global activity.
Yesterday the euro traded in a narrow range between 1.1362 and 1.1404. The high was the same as the day before which suggests a top may be forming.
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.”