It’s not the end, it’s not even the beginning of the end…

Winston Churchill is a hero of Boris Johnson’s and one of his famous quotes ends “this is just, perhaps, the end of the beginning,” which fits the current Brexit situation perfectly.

Johnson has declared the Withdrawal Agreement between the UK and EU, negotiated by Theresa May, dead. The markets believe that no matter what tactics Johnson uses the chances of a no-deal Brexit have increased and the economy will suffer accordingly. Despite the various numbers that have been bandied about, not all negative, the most popular view is for a cost of around £40 billion. It is unclear whether that number includes the £39 billion “divorce payment” that is also payable upon departure.

While the Bank of England estimates a major hit to GDP, Governor Carney prefers to wait for real evidence before committing to a rate cut.

The new Cabinet sees a real distinction between what they consider a no-deal Brexit and a “disorderly Brexit” since plans are being put in place not deal with any short-term disruption. The Confederation of British Industry believes its members are nowhere near prepared. This is either a testament to their confidence in the previous administration or a faint hope that a deal can still be reached.

Traders believe that a no-deal Brexit is not yet fully priced into the level of Sterling and more volatility is likely. The 1.2000 level versus the dollar is the first target with a test of 1.1500 not out of the question.

Yesterday, the pound fell to a low of 1.2212, closing at 1.2223. There is a danger that conditions that lead to a “flash crash” could be developing as the market becomes “one-way round” and liquidity collapses as bids disappear.

Overnight it has fallen further making a low (05.00BST) of 1.2152.

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Dollar retains gains as FOMC looms

One of the most eagerly awaited FOMC meetings for some time starts today as markets eagerly await news of the Fed’s intentions. It would be a major surprise to traders if short-term interest rates were not to be cut by 25bp when the meeting concludes tomorrow. However, the dovish expectations which led to talk of a 50bp cut have disappeared as economic data has been more supportive than had been expected.

Jerome Powell has been under fire from the President for the series of hikes that took place last year. This first cut since 2008 is unlikely to quell President Trump’s demands unless it comes with the promise of more.

U.S. economic data has been relatively strong since the last FOMC meeting where a rate cut was all but confirmed but as the more vocal FOMC members have said, this cut will provide “insurance”, should the data start to weaken.

The other and perhaps more significant event, given the amount of advance guidance given by the Fed, is the July employment report which will be released this Friday.

Since the past two reports have been positive despite the rather erratic nature of the data, there is an expectation that the mean number analysts expect of +170k could easily be beaten. The Fed’s comments tomorrow evening could provide a clue to the strength or otherwise of the data should Powell allude to either the continued strength of the economy or a gradual slowdown.

The dollar index remained close to two-month highs yesterday reaching 98.17, closing at 98.05.

No-Deal Brexit “another nail in the euro’s coffin”

While it is the pound which is taking the brunt of the market’s concerns over a no-deal Brexit, there are concerns in Brussels about just how the region will be able to compete with the UK once it has recovered from the initial shock of the departure. A euro at par, or close to that level, versus Sterling will make imports from the UK cheaper thus improving the effect on the supply chain but the UK’s competitiveness in global export markets will improve exponentially.

There is a disconnect between the economic Eurozone and the more political EU Commission which threatens the future of the entire region. While it is hoped that incoming ECB President Christine Lagarde will be able to bridge that gap, the harm may already have been done. Despite giant strides in the integration of all members of the single currency, the final steps, fiscal and social welfare, are still some way from being agreed.

The lack of a unified fiscal policy, where tax rates can be unified thus giving a significant and possibly life-saving tool to the Central Bank, are some way away from being agreed.

With Lagarde and Ursula von der Leyen at the helm of the EU, it will be interesting to see if they will be able to produce a level of harmony that was missing between Draghi and outgoing Commission President Jean-Claude Juncker.

Yesterday the euro managed to bounce off the support around 1.1100, although it will remain affected by the outcome of the two major U.S. events this week. It reached a high of 1.1152, closing at 1.1145. It has weakened a little overnight, falling so far to 1.1133.