Market continues to desert Sterling

May to press ahead with Brexit Customs plans

Theresa May is planning to put remaining in her position as Prime Minister and the Conservative Party continuing in Government above the wishes of the UK population as she plans to adopt a “Brexit lite” customs plan which ties the UK to the EU even after Brexit. Her plans appear to be the only way in which she can placate the Northern Irish Democratic Unionist Members of Parliament who continue to prop up her Government.

This stance will place her on a collision course with several colleagues both within her Cabinet and on the back benches. Faced with a dilemma over proposals for the Irish border post-Brexit, she has opted for the entire UK to remain within the customs union rather than either “hiving off” Northern Ireland or placing the border in the Irish Sea.

The continued politicization of the Brexit decision is bringing more harm to Sterling despite the market’s basic expectation of “hard Brexit bad, soft Brexit good” when it comes to the currency.

The essence of Brexit is not based upon any short-term regulation. The surprising referendum result in June 2016 was based upon a desire to get out from under Brussels and its bureaucratic decision-making processes.

Sterling continued its recent fall on Friday making a low of 1.3486 and has now wiped out all the gains made so far in 2018. It is similar story versus the single currency as it approaches significant support at 1.1280 making a low of 1.1307 and closing within a pip of that level.

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Dollar shrugs off employment disappointment

The much-anticipated U.S. employment report was issued on Friday and despite a 30%+ revision to the March data, the headline non-farm payrolls data disappointed the market since “only” 164k new jobs were created. It is odd that traders can be so disappointed by a number that first is first virtually an estimate and second the highly unscientific way their expectations are arrived at.

The major disappointment, however, was the fall in wages growth from 2.7% in March to 2.6% in April. It is unclear whether this will be sufficient for the FOMC to hike short term rates at next month’s meeting.

One thing was made clear by the data was that is it is not wise to stand in front of the moving train that is market sentiment.

After what seems like an eternity of a weakening dollar, it has now being driven by such headwinds that even a disappointing employment report that has long been the “flagship” monthly data release can be shrugged off.

This leads me to believe that the advances made by the dollar index over the past few weeks have had little to do with the domestic U.S. economy and more to do with President Trump (whether you agree with his methods of not) reasserting the position of America on the world stage.

The dollar index reached 92.90 on Friday before correcting a little but has started the week again on the front foot

Euro continues to live in the shadows

The path being taken by the single currency in the face of the onslaught from the dollar is entirely in keeping with the desires of the European Central Bank. Although they cannot be seen to be rejoicing in the currency’s recent weakness, it is in their interests for the currency to weaken.

This benign neglect may not be to the liking of the Bundesbank and it is probable that the election of its President Jens Weidmann to replace Mario Draghi will bring it to an end despite the possibly disastrous consequences of a far stronger Euro for the weaker economies of the Eurozone.

The euro is approaching a significant point at 1.1880 which has been considered pivotal for the currency on several occasions whether as support or resistance. As the market has become completely dominated by the dollar in recent weeks it remains to be seen if that level can hold if the market continues to want to desert the euro.

There are no significant data releases due this week from the Eurozone, so the single currency is likely to remain within its (lower range). An approach towards 1.2000 will attract sellers while the previously mentioned 1.1880 level should provide support, certainly on trader’s first attempt to test the markets resolve.