29 October 2019: Johnson to try again

Johnson to try again

29th October: Highlights

  • Parliament turns down Johnson’s offer
  • Market awaits FOMC decision
  • Analysts see no reason to buy single currency

Minority parties provide election hope

Boris Johnson’s offer to allow Parliament longer to debate the Brexit Withdrawal Agreement that was passed in principle last week was summarily dismissed by MP’s in a vote later last evening. The reason that the Leader of the Main Opposition Party instructed his MPs to vote against was that he simply cannot trust Johnson to keep his word.

Johnson continues to hold himself and his Party up has the only ones prepared unequivocally to deliver Brexit, although his assurance that the UK would be leaving the EU by Halloween “no matter what” has failed to materialise.

However, despite the Government failing to gain the two-thirds majority of MP’s in favour of a December 12th election, all is not lost. A further Bill will be presented, as soon as tomorrow, calling for an election that will only need a simple majority to be passed and as the Scottish Nationalists and Liberal Democrats are likely to vote in favour the odds remain that there will be a General Election before year-end.

Sterling remain in a state of flux as uncertainty remains. Although Brussels allowed what it calls a “flextension” until 31st January which can be exercised earlier if the UK passes the withdrawal agreement, uncertainty remains over just what the outcome of an election would be.

That uncertainty has translated into a period of consolidation for the pound as the news of further Parliamentary dithering was offset by two prominent global fund managers both announcing that they have gone “overweight” Sterling. The pound reached a high of 1.2877 versus the dollar, closing close to that level.

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Powell facing balancing act.

It is rare for the market to be in such a state of uncertainty about the likely outcome of a Federal; Reserve rate setting meeting as it is going into the latest version of the FOMC.

Since he came to office in February last year, Fed Chairman Jerome Powell has cultivated an atmosphere of uncertainty around Fed actions almost as a challenge to market participants. This has contrasted greatly with both the President and Treasury Secretary who have left no one in any doubt that they believe that the fact that rate cuts have been slow in materialising have led to a stronger dollar than the economy warrants and have handed a competitive advantage to America’s trading competitors.

So, as the FOMC meets in New York, the voting members have kept their cards close to their chests either due to their own uncertainty or in deference to the wishes of their Chairman.

Inflation has barely been an issue for consideration with economic growth at the top of the Administration’s agenda with prosperity a key factor in President Trump’s re-election campaign.

The Fed’s preferred gauge of inflation, Personal Consumption Expenditures, will be released just prior to the Fed’s announcement on Wednesday and my give an 11th hour indication if the data is as strong, at 2.2%, as the market expects.

The dollar index remains well supported and will probably remain so with 97.20 unlikely to break even if there is a further rate cut this week. Yesterday, it reached a high of 97.89, closing at 97.74.

Global trade affecting Germany and therefore Eurozone

While the market’s focus is trained upon trade talks taking place between Washington and Beijing, a secondary concern that emanates from global trade tensions is their effect on the Eurozone.

Every piece of positive information or encouraging comment that comes from the talks gives a boost to the prospect of Germany eventually leading the region out of its downward spiral and into a new era of growth and prosperity.

Meanwhile as productivity and economic activity continue to recede on a monthly basis, major fund managers globally who have just announced an overweight Sterling position remain underweight the single currency and intend to remain positioned in that direction for the rest of 2019 at least.

“Having faced years of crises or weak growth, the ECB has exhausted its conventional policy arsenal and now relies on untested, unconventional tools to stimulate growth.” So said Mario Draghi at his farewell speech before he hands over the reins at the ECB to Christine Lagarde from this Friday.

Just how Lagarde will react to the need for change when she accepts the challenge of creating an atmosphere conducive to growth and increased activity remains to be seen. It is certain that she won’t be able to do it alone as Sr. Draghi endeavoured (and failed) to do for his eight long years at the helm.

The euro is in trouble there is little doubt and it has been something of a miracle that inflation has remained as benign as it has given the inherent weakness of the currency. That is testament to the extremely weak domestic economy as well as the inability of banks to lend.

Yesterday the single currency traded in a narrow range hemmed in by two-way interest. It traded between 1.1107 and 1.1076, closing at 1.1103.

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.”