28 Mar 2019: May offers to quit to save her deal

May offers to quit to save her deal

March 28th: Highlights

  • Sterling falls following DUP refusal to back the Withdrawal agreement
  • Dovish Draghi bemoans the global economy
  • Dollar rangebound as traders concur with Fed

MPs still cannot agree on what they want from Brexit

Having wrested a degree of control over Brexit from the Government, MPs voted last night on eight proposals to break the impasse which has plagued the entire process. The votes which were “indicative” all failed to gain a majority of support which simply adds to the confusion although it does bring “no deal by default” closer.

Theresa May, the Prime Minister, took the unusual step earlier in the day of confirming she will leave her position if MPs pass her Withdrawal Agreement. This is the perfect illustration of how the whole process has now become dominated by personality rather than principle since two major Brexiteers, Boris Johnson and Jacob Rees-Mogg indicated that they would now vote in favour.

Mrs May has indicated that the third vote on her proposals could be held tomorrow although Speaker John Bercow reiterated his ruling that unless the Bill is “substantially different”, he won’t allow a vote. Various ways are being discussed that could circumvent Bercow’s ruling but they could set a dangerous precedent.

The mood in Brussels has darkened considerably with no deal now becoming the EU Leadership’s expectation for the outcome of the entire process. The Northern Irish MP confirmed late yesterday that they will not support a deal in which there is a backstop arrangement that doesn’t have a legally binding “get out” clause. That almost certainly means that if Mrs May gets the Bill in front of the House again it will fail, even if it is by a narrower margin.

The pound continues to gyrate as uncertainty continues. It traded in a 1.3269/1.3166 range yesterday, closing at 1.3191.

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Draghi “kicks the “rate hike can” further down the road

Not only will Mario Draghi, the ECB President, leave office in November never having presided over a rate hike, but it appears his successor will have to wait a significant amount of time before he or she is able to tighten monetary policy too.

In a downbeat message yesterday, Draghi reiterated that the Central Bank is “not short of instruments” to “deliver on its mandate”.

It is, however, hard to see what else the ECB can do to arrest the alarming slide in economic activity. Draghi added to what the market was already well aware of by saying that threats to growth are rising.

He also promised to “look again” at the effect of negative rates as banks complain that they are hurting both their ability to lend and their profitability. Banks effectively must pay the ECB to place excess liquidity with the Central Banks but in order to increase lending, they must place a higher amount of deposits to maintain liquidity ratios.

The euro remains mired in negative sentiment which reflects perfectly the sense of concern about when the region can expect to “bottom out”, let alone start to grow again. While the single currency is being driven by its high representation within the dollar index, it remains in an overall downtrend.

Yesterday, the currency ranged between 1.1286 and 1.1242 versus the dollar closing virtually on the low. It continues to weaken versus Sterling although this is mostly a retracement of the pound’s recent weakness. The pound reached a high of 1.1788, eventually falling back to close at 1.1729.

Fed cools market volatility as Traders await new drivers

One of the major goals for any central bank is to smooth the volatility of the economy and currency. This is especially true for the Federal Reserve which must deal with the global effect of its decisions as well as the gyrations of the currency.

The dollar is supposed to be the province of the Treasury, but that role seems to have been subtly changed by President Trump since his well-publicised disagreement with Treasury Secretary Mnuchin over the strong dollar policy.

In a similar manner to the ECB, the Fed administration seems to have decided that if the management of the economy is “on point” then the currency will reach a level that is commensurate with the economic cycle.

There seems to be acceptance of the Fed’s new data dependent policy as volatility has been lower although speculation remains that the economy is starting to falter. The flattening of the yield curve, which plots the difference between the yield on various tenors of government debt, is an indication of the markets view that the next move in short term rates will be a cut.

Should the yield curve become inverted, where the yield on long term Government debt becomes lower than the short-term, it is an indication of a future recession. In the last fifty years, an inverted yield curve has only twice not led to a recession.

The Fed has myriad tools still at its disposal, unlike the ECB, to ensure that any downturn doesn’t become anything more serious but so far, the indicators are still unclear.

The dollar is currently reacting to supply and demand as traders await more information in the shape of activity indicators and next week’s employment report will also be eagerly anticipated.

Yesterday the dollar index reached a high of 96.98, closing close to that level, up 16 pips 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.”