28 Nov 2018: May’s isolation grows

May’s isolation grows

November 28th: Highlights

  • Country-wide tour feels like “desperation”
  • Trump prepares ground for confrontation
  • Euro facing further losses

Prime Minister in danger of becoming a “sideshow”

The UK Treasury is considering suggestions about whose face the public wish to see on the new fifty-pound note when it comes into circulation. It may have been said with a sense of irony and with tongue firmly in cheek, but one of the suggestions has been Margaret Thatcher.

The current Prime Minister definitely has two things in common with the “Iron Lady” but no matter how hard she tries to emulate her passion and determination, she falls well short in her ability to persuade people to her cause. As only the second female Prime Minister in British history, Mrs. May is also almost as divisive as Thatcher.

Her tour around the UK, attempting to persuade a population which is “glazing over” at the mere mention of Brexit, seems to be both futile and without focus.

The real battle will be fought in Westminster and although the deal so painstakingly won has been criticized from virtually all sides, the “coup de grace” is still two weeks away. There is little opportunity for that time to be put to good use and a proposed televised debate between the Prime Minister and Leader of the Opposition is in danger of simply illustrating the dire state of UK politics that Brexit has uncovered.

The country has been virtually paralysed by Brexit for the past two years or more, and today the Government will present its various scenarios for the economic cost and effect for the future of the country outside the EU. Lost investment is facing the worst case of £150 billion, while under the current plan, the cost is a “mere” £40 billion. Just how those figures are broken down remains to be seen.

Yesterday the pound reacted to the comments of President Trump, in which he said the Brexit deal was a “good deal for the EU”, and that a trade deal between the UK and the U.S. would be “difficult to achieve under the terms agreed between London and Brussels.” It reached a low of 1.2725 before closing close to the low at 1.2734.

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Trump preparing for Xi meeting

President Trump is dusting off his best “isolationist” outfit for this week’s G20 summit which is being held in Buenos Aires. His confrontational attitude over trade between the U.S. and China has already led him to threaten that tariffs on the final $240 billion of U.S. imports will be applied should China fail to respond to demands that it stop dumping goods in the U.S. and open its borders to further U.S. goods.

In an interview published earlier in the week, the President said that it was “highly unlikely that the U.S. would accede to a possible Chinese request that he ‘hold off’ on implementing further tariffs until January.” It seems that Trump doesn’t do “acts of good faith”.

There have been comments from members of the FOMC so far this week that have backed the continuation of the hiking bias that has seen three hikes this year with another slated for next month.

Fed Vice-Chairman Richard Clarida backed more hikes but they must be “data dependent”. St Louis Fed President and FOMC voting member James Bullard noted that a few cracks are appearing in the U.S. economy driven by the rate increases and the “fading effect of fiscal stimulus” but since rates remain well below historical levels more hikes may be needed.

Jerome Powell the Chairman of the Federal Reserve and his committee’s policies were again criticized by the President in a newspaper interview this week but that won’t have too much effect on a speech he is making later today.

The minutes of the latest Fed meeting will be published tomorrow and the mood won’t have changed from a continued steady increase in rates which is both data dependent and influenced by the global economic situation.

The dollar index rallied further yesterday as trade tensions continue to cause a flight to low-risk assets. It closed at 97.36 having reached a high of 97.50.

Euro weakens as negatives mount

It has been said many times that the people of the EU love being European but hate the constraints inflicted by the Eurozone.

There is a clear divide between the conservative financial methods of the Northern states, Germany in particular and the more free-wheeling style of the Mediterranean countries. It was hard to see it working twenty years ago but it is interesting that it has taken nearly an entire generation who have never used Pesetas, Lira, or Drachma for the cracks of nationalism to be widened by forced austerity.

Italy was always likely to be the most fertile ground for a nationalist uprising given the size of its economy and the passion with which it has in the past embraced radical policies.

So it is proving with the gap between Rome and Brussels over the 2019 budget widening as both sides position becomes more entrenched. For Rome, it is simple. The Government sees no end to the current situation as Frankfurt continues to drive Rome towards a greater financial restraint, while it sees its people suffering from falling living standards and lower social investment.

However, for Brussels, the issue is far more wide-reaching. Do they go in hard, possibly bringing an exceptional reaction or act in a more conciliatory manner perhaps encouraging other nations to become more like Italy?

There seems no end to the issue on the horizon so it is left to the market to speculate upon the possible outcome. It is sure that either outcome or any in between, is going to be harmful to the single currency which is facing a test of its low for the year.

Yesterday, it reached a low of 1.1277 and closed at 1.1296. The low for 2019 of 1.1215 is now in very clear focus.

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.”