Market concerned over Brexit terms
30th June: Highlights
- Sterling breaks 1.10 level versus euro
- Covid spikes hit dollar’s credibility
- Euro rallies on positive perceptions
Johnsons Australia Style Brexit a veiled no deal threat
There has been a great deal of posturing (by both sides) over Brexit which has been encouraged by two arch-posturers Boris Johnson and Michel Barnier. Johnson invokes his inner-Thatcher in believing that if I say it, it will happen.
Michel Barnier meanwhile adopts a loftier approach where he appears to say this is what will happen if you leave the EU with no deal. When it blows up, don’t’ say I didn’t warn you.
Both sides are going to have to be more realistic in their demands after today because this is the day that the UK’s ability to request an extension expires.
Johnson has said he is expecting the UK to adopt an Australian style Brexit. To which the EU Commission President replied but we deal with Australia under WTO rules. I imagine Johnson’s reply was exactly.
Despite the posturing, negotiations resumed yesterday and there is sure to be some progress made. As Angela Merkle said in a number of newspaper interviews, if there is no deal done, the UK will have to live with the consequences. More posturing? No, that is a hard fact.
Despite there apparently being only a 5% chance of no deal, traders got jittery yesterday and added to short positions in the pound versus the single currency. It fell to a low of 1.0891, a level not seen since a few days after lockdown started in the UK.
QoQ GDP data will be released later this morning with the economy likely to have contracted by 2% between Q4 ‘19 and Q1’20. While this is a major reversal, it will be nothing compared to the data for the quarter that ends today.
Don’t judge until campaign starts
Trump’s rallying call this week is don’t judge the numbers until the campaign starts in earnest.
To be fair, Biden has had to do very little to find himself in what looks to be a fairly unassailable position. U.S. politics is far more about a cult of personality than a set of policies that the voters can mull over to make their decision. Very little is known about Biden’s plans except that he is a) a Democrat and b) not Donald Trump.
As in the UK where there are two significant economic drivers, Covid-19 and Brexit, the same is true in the U.S. with the election replacing Brexit.
With spikes and hotspots still springing up across the U.S. but predominantly in the South and West, the Administration still has a great deal of work to do to get the pandemic under control.
Also, the perceived wisdom is for there to be a second spike as the weather deteriorates into Autumn and winter. That brings a further question. How will the election result be affected by a significantly lower turnout than usual and if he loses under such circumstances, will Trump accept the result?
The economy is in fairly safe hands and today’s calendar is littered with speeches and testimony from Fed officials and Treasury Secretary Steve Mnuchin.
Lael Brainard, a permanent member of the FOMC will speak later before her boss Jerome Powell testifies in Congress. She is seen as a reasoned voice and will speak more about the technicalities of the Fed’s options than how she would vote for more stimulus.
Powell is likely to confirm the need for continuing the various jobs schemes that expire at the end of next month since it is his belief that the economy will take longer to bounce back than is inferred by the more bullish statement likely to be made by Mnuchin.
Yesterday, the dollar index fell to a low of 97.11, but closed virtually unchanged at 97.45.
Positive vibes drive the euro higher versus Sterling
Yesterday was a fairly classic example.
The data from the Eurozone was mediocre at best with several indexes of confidence failing to live up to expectation, but nonetheless, the euro rallied to new highs versus the pound and managed to make ground against the dollar.
There is no reason for this other than to fall back on improving sentiment. This is a catchall comment and is just as likely to be used in the opposite sense should the market reverse later today or later in the week.
There has been a prediction that the ECB will boost QE by one trillion euros (the numbers are now entering Dr. Evil territory) but as has been said before, until there is more fiscal support, monetary support is little more than a comfort blanket for economic performance.
There really is only one story the market needs to be concentrating on. What will be the outcome of no deal? No, not Brexit but the non-deployment of a Pandemic Relief Fund.
France and Germany are trying to get to the root of the Constitutional issues facing the Frugal Four, while Germany itself is working with the ECB on a workaround for its own Constitutional dilemma.
In the meantime, the market feels positive towards the single currency. Perhaps this is because the Eurozone is the best of a bad lot when it comes to Covid-19. With the UK having to perform a regional lockdown and the U.S close to the same, the significant drop in new cases is encouraging bold steps to fully reopen the economy.
The euro rallies to a high of 1.1288 versus a becalmed dollar yesterday, closing at 1.1244.
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.”