28 October 2019: Election and Brexit delay drive Sterling lower

28 October 2019: Election and Brexit delay drive Sterling lower

Election and Brexit delay drive Sterling lower

28th October: Highlights

  • Sterling awaits updates
  • FOMC to decide of rates
  • Single currency awaits stimulus

Traders await news from Brussels

The pound gave back a large part of its recent gains on Friday as Boris Johnson’s paltry offer to Parliament to allow greater time for a debate on his Withdrawal agreement provided MPs agree to an election on December 12th received a lukewarm reception from the main opposition Party.

Over the weekend, however, Johnson received something of a boost as two of the lesser opposition Parties, the Scottish Nationalists and Liberal Democrats agreed to an election even sooner that December 12th provided the time isn’t used to “rush through” Brexit.

As things stand the entire election ruse is something of a red herring as it is still uncertain if Brussels will agree to an extension despite Donald Tusk recommending three months, particularly since French President Emmanuel Macron is only supporting a far shorter period.

It remains to be seen if the Labour Party will be able to rally its entire group of members around keeping the Government hostage to a more favourable deal since many of them represent constituencies that voted to leave and they see an election, whenever it is held, as being extremely precarious to their chances of being re-elected unless they are seen to be supporting the interests of their constituents.

The entire optimistic note that was struck by the Withdrawal Bill being approved has now dissipated and it is now uncertain as to what the next move will be. In the words of the Prime Minister, it is “morally impossible“ to countenance Parliament “hanging-on” for no reason other than to frustrate Brexit entirely.

On Friday the pound fell to a low of 1.2802, closing at 1.2826. It also fell versus the single currency, making a low of 1.1533 having reached a high of 1.1661 earlier in the week.

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Employment to determine Fed action

Over the past several meetings of the Federal Open Market Committee, it has been fairly clear of how the members have been thinking even if they haven’t always decided to lower short-term interest rates. The economic data and the general feeling within the financial community has been of a slowing economy. This is despite the slowdown being very gradual and possibly, to interpret, in the words of Chairman Jerome Powell, a “mid-cycle adjustment”

The meeting that will get under-way tomorrow and conclude on Wednesday is very finely balanced although there have been very few comments made by committee members that betray how they will vote. It seems that several members are undecided, and it may be that they are swayed by the local economies from the Cities they represent.

The U.S. economy has become polarised recently with certain areas faring better or worse than others. Farming communities are suffering and the blame for this has been placed firmly at the door of the Administration and the phoney war they are waging with China despite positive noises being made about progress by both sides.

With employment data due to be released on Friday, rather surprisingly on the first day of the month, it is expected that the FOMC will have advance guidance of how the jobs market is faring, although this is unlikely to have much bearing on the decision unless it is wildly out of line.

Initial estimates from analysts see a fall in new jobs created close to +110k which is significantly lower than in September.

It remains the market’s best guess that the Fed will “stand pat” this month and allow the recent cuts to feed through the market, at least that is probably the line that Powell will use to bat away criticism.

Last week, the dollar index recovered from three weeks of losses, managing to stay above support at 97.20. It made a high of 97.90, closing at 97.83

Can Lagarde and Von der Leyen provide a cure?

It is impossible for traders to find anything other than technical reasons to buy the single currency in the current environment as the data that is emanating from individual members of the Eurozone, as well as the collective, are universally weak.

Try as the ECB might to stimulate lending through rate cuts and additional liquidity, the debt overhang affecting both the financial institutions and large corporate entities is just too great.

Even the bending of accountancy regulations to allow banks longer to write off bad debts is having very little effect.

Unless there is a concerted effort to create a more Federal structure there is a real danger that the entire there may be one or two high-profile departures. These may not necessarily be from the periphery with rumblings from Berlin about what will happen when Mrs Merkel is no longer in control.

While nationalism didn’t make as much headway as had been expected at the most recent elections, this cannot be allowed to continue.

The most acceptable changes will be to bring the entire region together under a single fiscal agreement that will unify taxation, social benefits and pensions. This will be the final act in the creation of a single European Superstate and it is unclear is the entire region is yet ready to make that commitment. However, the time is coming when it will be all or nothing.

The single currency continues to languish as economic activity continues to slow. The fact that the most recent data shows the pace of the downturn slowing that may be simply due to the global economic situation.

Last week the single currency remained in a relatively narrow range between 1.1179 and 1.1072, unable to break 1.12 and attracting buyers close to 1.10. It closed at 1.1079

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.”