Buckle up for a bumpy January
December 31st: Highlights
- Buckle up for a bumpy January
- Brexit drifting, almost inevitably, towards no deal
- Euro at twenty, still facing structural issues
Employment and Manufacturing data to set the dollar’s tone
The questions about the strength or otherwise of the U.S. economy will continue this week as President Trump continues to question the Fed’s actions through 2018 given that the Chairman of the FOMC has plowed his own furrow. There is little doubt that appointing a “non-economist” as Fed Chairman was a risk but one that has characterized the first half of the Trump Administration perfectly.
Having lost/changed almost 50% of his inner cabinet, he can hardly be surprised that a lawyer would bring an entirely different set of skills to the job to a person with a background in finance.
It would be impossible to imagine such a change happening at the ECB when Sr. Draghi steps down later in the year.
The insults being promulgated by President Trump pointed at the Fed are unlikely to continue since they have sufficiently deflected the attention of the markets away from his decisions to provide increased stimulus to the economy in Q1/2 which led to the Fed to continue raising rates.
The dollar is not going to receive the same boost from the widening interest rate differentials that it received in 2018 and the general consensus among analysts is that the high in the dollar index is unlikely to be tested in 2019. It will have to rely on the strength or otherwise of economic data and the first test will come this week with manufacturing data on Thursday and employment on Friday.
Last week, the dollar index traded between 97.12 and 96.19, closing at 96.38 in thin trade.
Pantomime season extended for a few more weeks
Looking back to the summer of 2016, it all seemed so simple (of course it wasn’t): Remain or leave. They were the simple choices. There was no thought of the Irish border or a backstop, all the ideas of Leave were thought of (by them) as noble. Take back sovereignty, make our own laws, establish trade deals of our own choosing. Unfortunately, the reality has proven to be somewhat different.
There is little point to establishing blame as both sides believe they are fighting for the future of the country. The negotiations simply started badly have and got gradually worse. The first problem lies in the fact that the EU had no idea that a country would choose to leave of its own volition so made no hard and fast rules. Second, once Parliament started to become involved, Brexit took on Party Political lines which it was never meant to be.
This has led to the Brexit negotiations becoming a “poisoned chalice” that the Government was left holding. The Opposition saw a perfect opportunity, handed to them by the foolhardy General Election held in mid-2017 which saw the Government erode its own majority, to make political capital.
The pound has danced to the Brexit tune for such a long time, that it now seems that nothing else really matters. The high street has become decimated in 2018 with major stores unable to compete with online retailers. This has led to a fall in consumer confidence. The economy has drifted as the Central Bank has issued dire warning after dire warning about a no deal Brexit which is now becoming more and more of a reality.
Looking back, it seems unreal that interest rates were hiked this year. The Bank of England’s economists had no idea the effect that the fall in the oil price from $75 to $45 would have on inflation, in fact, it appears they never even realized it may fall, despite the oversupply situation that was “advertised” for months.
The pound had an untypically quiet week last week trading between 1.2616 and 1.2778 versus the dollar. It is unlikely to move far out of that range this week as traders prepare for the return of Parliament and the vote on Theresa May’s Brexit agreement which will take place during the week of January 14th.
Happy Birthday, Single Currency
Has it been a success?
That depends, like most political questions, on who you ask. Yes, it is a political rather than a financial or economics question since the reason the euro came into being was to simply solidify the political ideals that were developed by France and Germany designed to ensure that Europe (most of it) got along and no repeat of the wars that marred the twentieth century would be possible.
That effort continues as Europe leans towards greater Federalization but the rise of nationalism seen most clearly by the election of a Eurosceptic Government in Italy and the riots seen in France over the past few months have dealt a blow to the aspirations of Angela Merkel and Emmanuel Macron.
The role of President of the European Central Bank has changed hands three times over its twenty-year history and in 2019 a new President will be sworn in. It was expected to be Jens Weidmann the German Bundesbank President who was expected to be a “shoo-in” for the role; that is until Mrs. Merkel decided she wanted the EU Commission Presidency for herself and since giving two such high profile positions to Germans probably wouldn’t be approved, she did the noble thing and withdrew her support for Herr Weidmann, clearly feeling that this is not the time for selfless sacrifice.
Now, the Presidency of the ECB is up for grabs with no clear favourite. It was thought that the Governor of the Bank of England, Mark Carney may be “in the running” but he has accepted the challenge of staying in London to help steer the British economy through the first months/years of Brexit.
So, what of the euro? A success? The best I can offer is that it has been a limited success. It is without a doubt that the financial crisis that started in 2008 would have swallowed up several countries had they not been held together by the ECB and European Commission. Both bodies were prepared to make tough decisions which almost certainly helped Greece, Cyprus, Spain, Portugal, Ireland and of course Italy remain afloat with no defaults and no devaluation.
However, now that the economy is faltering, the ECB appears bereft of ideas, as its economists are at a loss to explain how inflation continues to fall just as the larger nations slip ever closer to a recession.
The euro has become something of a counterbalance to the dollar index over the past few months but in 2019 is expected to be able to “stand on its own feet” and challenge the dollar on what will be more of a “monetary policy level playing field.”
Last week the single currency traded between 1.1343 and 1.1477 versus the dollar which pretty much sums up its recent performance.
May I take this opportunity to wish you a Happy and Prosperous New year 2019.
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.”