29 Mar 2019: Brexit day? Not yet!

Brexit day? Not yet!

March 29th: Highlights

  • MPs to hold meaningful vote 2.5
  • All Eurozone signs point south
  • Greenback remains in the thrall of dovish CBs

Divorce deal to be voted upon but not a future relationship

In the unlikely event that Prime Minister Theresa May manages to win the vote which is being held in Parliament later today, she will owe a huge debt of gratitude to whoever came up with the idea of splitting the Withdrawal Agreement in two to satisfy the Speaker’s demands.

Today was the day that the UK was supposed to leave the EU. At midnight CET (11 pm GMT) the UK was set to leave. However, it has been quite clear for some time that that was never going to happen. We could have reasonably expected to be closer to the final throes of the UK’s membership even if there was to be a certain delay to allow for the formalities.

Later this evening, MPs will be given a further chance to pass the agreed deal between London and Brussels but with several Brexiteer Government MPs still holding out and the DUP maintaining its position, still unable to support a deal that has no legally binding way to leave the backstop agreement, the third attempt is doomed to end in the same way as the other two.

Will this be the end for Theresa May? Quite possibly. Will it finally see the end of Brexit too?

That is still in doubt as no deal still looms large on April 12th if MPs are unable to pull a “rabbit from the hat”.

What next for Sterling? As it became clear during the day that the withdrawal deal faced defeat, traders started to add to short positions versus both the dollar and euro.

Against the greenback, it fell to a low of 1.3034, while against the single currency it made a low of 1.1620.

Today is likely to be another volatile day but at the end of it will the next Brexit development be any clearer? That, unfortunately, is highly doubtful.

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Eurozone headed into recession

Several confidence indicators were released yesterday including industrial confidence and business climate. They were all lower than the previous month. While this was hardly unexpected, it confirms that expectation for future activity is heavily dependent upon the ECB managing to produce another “miracle” in the same way as it did to avert disaster during the Global Financial Crisis.

The difference this time is that there are few tools left to the Central Banks and the situation is, to a certain extent, out of its hands. Furthermore, the region is hardly coming off a period of significant growth and activity. It has barely recovered from the effects of 2008 and many economies are hobbled by austerity and heavy debt to GDP ratios.

The two most severely affected economies, Greece and Italy would, in the past, have devalued their currencies and begun to export their way to growth. That is not an option in the Eurozone and there are the beginnings of nostalgia for the “way it was”. It is most likely that had those countries been “independent” in 2008 that they would be, if not thriving, then certainly seeing respectable growth albeit from a lower starting point.

Bad loans totalling Eur 159 billion make up 10% of total lending in Italy alone and the total for the entire region is Eur 970 billion. This makes fresh lending very difficult and no amount of new facilities offered by the ECB can erase what has gone before.

The single currency remains in a downtrend. Yesterday, it fell to a low of 1.1213 versus the dollar, closing at 1.1322.

Where the Fed leads!

There is a hackneyed expression that when “America sneezes, the world catches a cold”. That is being born out again by global economic activity and the actions of Central Banks. Last year, when the Federal Reserve was rushing to normalize monetary policy, G10 Central Banks were striving to do the same even though their economies were not growing at the same pace as in the U.S.

While there were few actual rate hikes, the withdrawal of accommodation was top of the agenda. In Q3 ‘18, it was commonly anticipated that the ECB would withdraw their Asset Purchase Scheme which finally happened in January of this year and rate hikes would follow. The Bank of England hiked once in 2018 but the effect of the uncertainty generated by Brexit and lower inflation has put further actions on hold.

A slowdown in China has seen Beijing strive to stimulate growth and the fall in activity has hit the economies of Australia and more recently New Zealand. The RBNZ is the latest Central Bank to declare the rate hikes are on hold.

The signs are pointing to a continuing slowdown of economic activity in the U.S. It is doubtful that it can be attributed to last year’s rate hikes which, it is now generally accepted, were warranted as growth threatened to reach an unsustainable level. This followed tax cuts and infrastructure investment programmes initiated by the Trump administration.

The verbal intervention of the Fed has lowered market expectation at the right time and could be a masterstroke which sees a recession averted.

In the final year of a Presidency, there are often sweeteners handed out to create a positive impression in readiness for a re-election campaign. Since President Trump already made his “grand gesture” it will be left to Jerome Powell to provide the conditions under which business and the markets can begin to thrive again.

The dollar remains on a “well-trod path”. Yesterday, the dollar index ranged between 96.82 and 97.30, closing at 97.25.

Today sees the release of data for Personal Consumption Expenditures. This is the Fed’s preferred measure of inflation since it gives a broader view of price increases than the CPI data which is based on a subjective basket of goods. It is expected that PCE will be unchanged at 1.7% still well below the Fed’s 2% target.

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.”