30 October 2019: Election date set for December 12th.

30 October 2019: Election date set for December 12th.

Election date set for December 12th.

30th October: Highlights

  • Sterling now facing Election risk
  • Market awaits FOMC decision
  • Euro to continue slow decline

Brexit abandoned… for now

After more than three years of wrangling where it was unable to agree the type of Brexit it wanted the UK has given up trying to agree and decided that the current Parliament is unfit for purpose.

As he was unable to bully or cajole MPs into doing more than agree in principle with his draft Withdrawal Agreement, Boris Johnson decided to demand a General election, the third in five years, to which he managed to get a grudging agreement.

As has been typical of this entire period of British politics there was agreement and dissent from each side of the House in almost equal measure.

The Bill to hold an election on December 12th was eventually passed by an overwhelming margin as the Labour Party accepted that with two minor Parties supporting an election that Johnson would get his way.

So, the focus of the country, temporarily at least. will switch from the UK’s departure from the EU to electing a new Government. Early indications are predicting another hung Parliament or possibly a (very) slim Conservative majority.

For the next six weeks the focus of the country’s boredom threshold will be tested by interminable arguments as sitting MPs fight to retain their seats in Parliament hoping against hope that something will change following the election.

The financial markets see the election as an opportunity at least to gain some clarity on Brexit with a Conservative majority being the only real chance to get Brexit done. Sterling rallied following the result of the vote of the House of Commons reaching a high of 1.2905 before settling back to close virtually unchanged on the day at 1.2865

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Dollar slips, breaks support

As the financial markets await the result of the least predictable FOMC since Jerome Powell came to office, the dollar index fell through strong support at 98.20, falling to a low of 97.67 and closing at 97.75.

It is unlikely that traders are especially concerned about the prospect of a further rate cut since that would at least be a sign of proactivity from the Fed. The fall is more likely a veiled comment on and reaction to the uncertainty that is currently undermining confidence in the Central Bank.

Over the past few months, the Fed has almost promoted uncertainty within the financial community with a string or non-committal or ambiguous comments from FOMC members seemingly designed to keep the market guessing.

While it can be in the Bank’s best interests to not become predictable, it damages confidence in the entire system if traders are given an opportunity to second-guess, particularly if they are proven to be correct.

The contents of today’ inflation data and Friday’s employment report will already be known to FOMC members prior to making their decision. Although they profess (in standard Central Bank parlance) to not take notice of individual data releases, the trend for inflation to rise and employment to fall will add to the uncertainty over their next move on short-term rates.

By the time Powell stands up to speak once the announcement has been made, the markets focus will already have switched to the next meeting and the comments that the Chairman makes will likely have more effect than the decision itself. The decision will be announced at 18.00 GMT with Powell’s press conference at 18.30 (note, the U.S. has not changed its clocks yet)

Lagarde facing uphill battle

In financial markets as in life the first stage in recovery is admitting that there is a problem. After an extended period during which (former) ECB President Mario Draghi insisted that the economic slowdown in the Eurozone was a “temporary soft patch” a sense of realism appears to be finally pervading the Bank’s Governing Council.

Members of the Council are accepting that growth continues to slow with the Central Bank unable to arrest the slide. In an interesting parallel with the UK Parliament’s inability to decide what it wants regarding Brexit; the ECB cannot decide how to proceed although its options are very limited.

The appointment of the politically astute Christine Lagarde as President in preference to either German Jens Weidmann or Finn Olli Rehn could be a master stroke since the ECB clearly needs to foster a closer relationship with the European Commission.

Lagarde will be expected to work closely with Ursula von der Leyen who will replace Jean Claude Juncker this week. Their relationship will be crucial in achieving the changes both political and financial that are key to the long-term survival of the group.

Today sees the release of confidence data for the Eurozone with further weakness expected. Of greater interest to traders will be the release of German inflation data which is expected to fall from 0.9% to 0.8% year on year. This will do nothing for the feeling that the economy is bottoming out”.

Yesterday, the single currency rose to1.1119, closing at 1.1112. This was a reaction to dollar weakness rather than any positivity towards the euro.

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.”