A lament for Brexit Day 2.0
31st October: Highlights
- What might have been
- Fed pause sees dollar fall
- Confidence slide shows worst is yet to come
Sterling higher as campaign prelims start
Yesterday’s Prime Minister’s questions in Parliament was the longest ever seen as the pre-election preliminary sparring began. The leaders of the two main Parties each claimed that theirs is the only side that can deliver what the country needs with Jeremy Corbyn calling the December 12th election a “once in a generation opportunity”.
Although Brexit is in abeyance until after the election, the campaign still centres around the UK’s departure from the EU with the governing Conservative Party insisting that they are the only ones committed to delivering the result of the 2016 referendum.
Early indications are for the “minor” Parties to have a major say in the outcome of the election. Not necessarily in the number of seats they could win but in the way in which they will disrupt voting for the two “main” Parties. The Brexit Party could easily take votes away from the Conservatives while those Labour voters who want to remain may see a vote for the Lib Dems as an alternative.
British politics has become unpredictable with the result of the last election in 2017 a major surprise as the Government failed to secure a majority. If that result is repeated in December, faith in the entire system may be shaken with major reform the only way out of the issues another hung Parliament would bring.
Sterling has so far been unaffected by the election as it is too soon for any likely result to be considered. It traded between 1.29100 and 1.2894 versus the dollar yesterad, rallying overnight to a high of 1.2935 as the dollar weakened following the FOMC meeting.
Market remains unsure of next dollar move
Jerome Powell the Fed Chairman signalled at his press conference following the announcement that the Committee would pause to consider the effect of the cuts on the economy.
Being wise after the event, analysts commented that the Fed’s stance going into the meeting had been leaning towards the hawkish. This wasn’t particularly evident given the dollar’s weakness leading up to the announcement. The price action following the meeting betrayed both the markets confused state and the uncertainty that the Fed is feeding.
Inflation data released yesterday showed that there are still price pressures within the economy and the Fed will be right to be cautious about further cuts going forward. Personal Consumption Expenditures rose from 2.1% in Q2 to 2.2% in Q3 showing a trend towards higher inflation.
Tomorrow sees the release of the October employment report with analysts expecting a considerable fall in the number of new jobs created. The median estimate is for +100k but there are some who see it as low as 85k. In such an atmosphere of negativity a higher number could see the dollar rally significantly.
The dollar index rose initially yesterday following a sign of proactivity from the Fed then fell back, making a low of 97.45 and closing at 97.47. It has continued to weaken overnight making a low so far (05.30 GMT) of 97.28
Draghi’s departure heralds new era.
That is the hope of German Chancellor who championed Christine Lagarde for the role of President of the Central Bank and the expense of her compatriot, Bundesbank President Jens Weidmann.
Weidmann had appeared to be the “chosen one” to replace Draghi, not just because it was Germany’s “turn” but also because he was the man with the “credentials”. As it transpired the credentials Weidmann possesses are not what is needed in the current environment with a more open and less bureaucratic attitude needed to help push through the reforms so desperately needed by the Eurozone.
Along with Draghi’s departure, the EU Commission also has a new head in Ursula von der Leyen. She is a longtime colleague of Merkel and was considered likely to be her successor until she set her sights on Europe’s top job. As a German, Merkel considered her to be more important to her country’s role in the Eurozone going forward than what could be brought to the Central Bank by Weidmann.
It now falls upon von der Leyen and Christine Lagarde at the ECB to drive reforms to the fiscal landscape bringing a more unified approach. This will not be easy to achieve and may include a loosening of the purse-strings with the growth and stability pact being radically changed. This would allow for greater public investment, a change that has been demanded by Italy since its nationalist Government came to power.
It is likely that there will be major changes to the financial makeup of the Eurozone in the coming months and it will be interesting to see how the currency reacts to a more expansive regime. Yesterday the euro rallied versus a weaker dollar reaching 1.1157 and closing at 1.1152
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.”