Brexit on hold as EU declares “no renegotiation”
Morning mid-market rates – The majors
May 29th: Highlights
- EU says No! as trade minister expects fresh talks
- EU looking to announce Juncker replacement next month
- Dollar set to suffer if trade tariffs remain
Conservative Party leadership set to be “one policy” fight
The Brexit Party which did so well at the European elections is criticized for being a “one issue” Party with no policies or manifesto, yet the oldest and most “establishment” of the country’s Party’s is in danger of being seen in the same light.
While it is true that most of the country’s issues will need to be seen through a Brexit lens for some time to come, how the candidates will tackle the issues mentioned above will lead to stability and allow the new Prime Minister to be seen as more than simply someone to get the Brexit job done who then becomes disposable.
The economy continues to fare reasonably. Growth has clearly been affected by uncertainty over Brexit but the BoE has been able to allow things to develop at their own pace without any interference.
Inflation is starting to pick up in reaction to the fastest increases in wages in several years. Headline employment continues to defy gravity although several high profile firms particularly in the auto and retails sectors are seen shedding jobs going forward.
The pound is in a reactive mode as the market awaits a clearer message on the new PM as now eleven hopefuls approach the start line. Sterling closed a little lower versus the dollar yesterday at 1.2653 having made a low just four pips below this level.
Versus the euro, the pound’s recent fall looks to have found some support around the 1.1300 level. It closed virtually unchanged yesterday at 1.1337.
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EU Direction post-elections to be determined by new Commission President
The replacement for the EU Commission President Jean Claude Juncker will be announced at a Summit next month with France and Germany unable to agree on who should be given the job.
Angela Merkel favours a German (naturally) in the shape of centre right candidate Manfred Weber, while Emmanuel Macron did not even mention Weber’s name as a potential contender.
Mrs Merkel has overlooked Jens Weidmann as a potential ECB President in her efforts to get Herr Weber elected. Should she fail, then it is likely that Weidmann will become a “shoo-in” as Germany believes that it is time for it to exert greater influence over the bloc.
In a possible glimpse of the future, the refusal of Rome to “play ball” over its budget deficit and the generally nationalist policies of its Government, mean that Italy is to a certain extent being isolated from the “top table” of senior positions. Any such action is likely to infuriate Rome even more and bring the threat of further division.
The euro continues to be supported above the market’s longer term target of 1.1000 versus the dollar, although that may be partly due to the greenback’s current trade issues (see below)
The single currency fell to a low of 1.1159 versus a stronger dollar yesterday, also closing just a few pips above that level.
Concerns over trade situation could influence the Fed
It looks like the U.S. Treasury is going to expand its “observance” of currency manipulation by America’s major trading partners. Diplomatic efforts to try to find a solution have seemingly failed as the spat with China shows no sign of a conclusion while President Trump was apparently rebuffed by one of the country’s staunchest allies during a recent visit to Tokyo.
The introduction of tariffs by the President over the second half of his term has not had the desired effect on U.S./China trade as they have been simply met by tit-for tat measures. This is starting to be a major concern for several industrial groups, not least of all soya bean farmers who see their major export market being all but destroyed as China seeks alternative suppliers.
The whole dispute over trade is far beyond a case of who will blink first and financial markets are beginning to see that the U.S. has put itself into a possibly dangerous position economically. If it becomes likely that the Fed’s next move will be a cut, the dollar index could fall back to levels seen at the start of the year or even further. This would be potentially bad news for the euro if its recovery depends on exports and a weaker currency, while the UK would benefit from the inflation correcting benefit of a stronger pound.
Yesterday, the dollar index resumed its recent rally, closing virtually at its highest point at 97.97.
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.”