Sterling facing Brexit reality check

The pound had its second-best week of 2018 last week, but a fresh week brings the same old doubts to the market as the benefit of the perfect storm of a Brexit deal by Nov. 21, a deal on Financial Services, and a more hawkish than expected Bank of England lack any positive follow through.

Both London and Brussels have failed to confirm that progress has been made on a Financial Services deal while Brussels has been silent following Brexit Secretary Dominic Raab’s assertion that a deal is possible by November 21st.

The question of the Irish border which has been talked to death remains the most important stumbling block with all sides keen to have their say about the backstop that ensures there will never be a permanent border between the North and the Republic.

Friday’s construction activity data for the UK was better than expected and this gave the pound a brief lift, but the outlook is still negative as Brexit fears remain. The construction sector is one of the heaviest employers of EU nationals so any restriction on free movement will have negative consequences.

The pound gave back some of its recent gains on Friday falling to a low of 1.2951 versus the dollar and closing at 1.2968.

It opened higher in Asian trade this morning but conflicting reports in the UK weekend press stifled any optimism and it was last trading (0545 GMT) at 1.2985.

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Ecofin meeting to support Brussels stand on Italian Budget

Giovanni Tria, the Italian Finance Minister will face a rough ride as he attends the Ecofin meeting of EU Finance Ministers today. There is overwhelming support from the more powerful northern states for the EU Commission’s tough stance, while the weaker, more indebted nations, like Spain and Portugal, will support Brussels publicly while expressing sympathy for Rome’s stance in private.

The deadline issued by the EU Commission for Rome to amend its budget is set for November 13th, giving the market a little over a week to wait for the next dramatic episode in what could, in theory, be the beginning of the end for the single currency. While that may seem an overly dramatic comment, if both sides dig their heels in, and Brussels announces sanctions, that could be the natural final act. Deputy Premier Matteo Salvini has already said that Rome’s budget plans could be a “blueprint for Europe” ending austerity and fueling economic expansion.

Several news agencies have been reporting tensions mounting in the Italian coalition as the League Party widened its lead over its partner Five Star in the latest opinion polls. An aide to Salvini tried to pour cold water on suggestions of a split by saying that Salvini has no intention of using his party’s popularity to usurp Prime Minister Giuseppe Conte.

Rumours of further action are sure to emerge this week ahead of next week’s deadline but until there is a firm comment from Brussels, the euro will continue to be on the back foot. It rallied to 1.1456 on Friday before closing appreciably lower as the dollar regained its composure. It closed at 1.1387 and has remained around that level in early Asian trade this morning.

Employment data buoys dollar but Midterms loom large

Friday’s employment report in the U.S. showed that 250k new jobs were created in October, while the September figure was revised even lower from its already poor 134k to 118k. Most observers were prepared to accept that the bad weather in September seriously affected hiring and the far better data for October coupled with a rise to 3.2% in wage inflation helped the dollar index reach a high of 96.60 before it closed at 96.50.

This week we finally see the midterm elections start in the U.S. with the Democratic Party expected to make enough gains in the House of Representatives, where all seats are up for selection to become the majority Party, while not making sufficiently significant progress in the Senate to unseat the Republicans.

This vote has been labelled as a vote of confidence in the actions and policies of President Trump and he remains overtly bullish about the result.

While the election result will, without doubt, have a short-term effect on the path of the dollar, the economy is still in a comparatively healthy condition and the interest rate differential will likely continue to widen. These two factors will underpin the greenback notwithstanding a significant shift in the complexion of the U.S. political map over the next few days.