30 Jan 2019: Sterling lower as confrontation looms

Sterling lower as confrontation looms

January 30th: Highlights

  • MPs agree to send Prime Minister back to renegotiate backstop
  • Dollar awaits confirmation of Fed. rate pause
  • Euro on a long hard road as QE to return

MPs agree to send May back to Brussels

Last evening, the UK Prime Minister managed to unite Parliament behind a Brexit amendment which provided her with the ammunition to return to Brussels to try to convince them to reopen negotiations over the Withdrawal Agreement with particular reference to the Backstop.

The upshot of last night’s Parliamentary debate and votes was that MPs agreed that the current Withdrawal Agreement is dead. They decided that they don’t want a “no deal” Brexit and this removed the obstacles that have led the Leader of the Opposition to refuse to meet and discuss with Theresa May how Brexit can move forward.

The so-called Brady amendment was passed comfortably but saying something will happen doesn’t mean it will. There has been a chorus of reaction from all over the EU in which several leaders have said that the negotiation of the Withdrawal Agreement ended last year and cannot be reopened.

Despite confirming that they do not want a “no deal” Brexit, MPs have done little more than “kick the can down the road”, giving Mrs. May two more weeks grace but in essence, no deal remains a real possibility, given the lack of an alternative.

The financial markets got the point quickly and Sterling fell to a low of 1.3051 in the aftermath of the vote as traders saw no chance of a reconciliation with Brussels and a Parliament that cannot now compromise or accept the deal as presented.

There is a possibility that when Mrs. May reports back in two weeks time, having been rebuffed by Brussels that the March 29th date may be extended but an extension of longer than three months will run into the European Elections and the UK could be bound to hold those elections to ensure the legality of the entire process.

Sterling recovered a little after its initial fall, closing at 1.3077 and has made a high of 1.3092 overnight. As the next two weeks pass and Brussels remains committed to its refusal to reopen talks, it is unlikely that the pound can move much higher against a background of such uncertainty.

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Dollar treads water as the Fed meeting starts

The market feels a bit like a child awaiting Christmas morning, certain of what his present will be, but with just a hint of concern that he may be disappointed.

The first FOMC meeting of the year is underway and Chairman Jerome Powell will make an announcement later on this evening on the vote concerning interest rates and summarize the discussions. There are certain words and phrases that the Chairman will use to confirm, or otherwise, to the market that signal a pause in interest rate rises.

It never pays to second guess Central Bank decisions but traders are as certain as they have ever been that rates will be unchanged at this meeting and going forward for at least the rest of the first half of the year.

There is little doubt that Powell retains a capacity to surprise if not shock markets so his phrasing may not be as dovish as markets expect but a return to a more data dependent Fed should convince them.

While the interest rate differential between the U.S. and the rest of G7 will stay the same, it should provide some support for the dollar as rates in Japan, the Eurozone and UK are firmly on hold.

The greenback reacts to so many influences that it cannot be a foregone conclusion that a pause to rate hikes will see it suffer. Yesterday, the dollar index managed to rally a little reaching a high of 95.87 although it has given back most of those gains overnight and remains in a narrow range.

Could recession fears bring back Quantitative Easing?

When he announced the withdrawal of the ECB’s Asset Purchase Scheme last year, Mario Draghi, the Central Banks President, appeared tentative, almost giving the impression that deep down he was unconvinced that it was the right time for such a move. He even commented that should the economy fail to perform as the ECB expected it could easily be reinstated.

It would appear that the data issued so far this year and the growth figures yet to be released will confirm the worst case scenario and further stimulus, while not solving the problem, may make the recession shallower than it may have otherwise been.

Last week’s ECB meeting probably had QE as a point close to the top of its agenda and it will be interesting to note when the minutes are released what the consensus view was. Germany is likely to have been against as it doesn’t benefit since its Government bonds are the benchmark and easily placed in the market but France, Spain, and particularly Italy, will be keen to see the ECB as being a ready purchaser of new and existing debt as their fiscal position weakens.

It is not a case that such a move will be the “straw that breaks the camel’s back” since the collapse of the Eurozone, EU or single currency remain unthinkable. However, it will add to a feeling in Germany that it is starting to become less of a leader and more of a crutch for the rest of the Eurozone to rely upon.

The euro remained in a tight range yesterday, opening at 1.1428 and closing just three pips higher on the day.

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.”