May fails the first test

The UK Government suffered the humiliation of three defeats in votes in the House of Commons yesterday as the debate on the Government’s Brexit agreement got underway. The first defeat was over MP’s demands that legal advice that the Government received over the backstop agreement be published in full. They were found to be in contempt of Parliament and have been forced to release the text in full.

The other defeats were procedural but the final blow was that MP’s will now have a more say in a new deal should the existing agreement be voted down next week.

The day had started on a positive note for the pound as the European Court of Justice had decreed that the UK was able to abort Article 50 without any further request to Brussels. While this is highly unlikely to happen, it gave the UK more freedom over is future. Commentators saw the irony in the decision in that should Mrs. May’s proposals over the backstop be passed, it meant that the UK was free to withdraw its departure but had to receive the agreement of Brussels to leave.

The pound was relatively stable in the first part of the day but began to gyrate as events in Parliament unfolded. It traded in a range of 1.2840/1.2658, closing just seventeen pips lower at 1.2711. It has continued to weaken overnight as the expectations of further volatility rose. It has reached a low of 1.2680 so far.

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U.S. Government bond yields invert

The shape of the U.S. bond market yield curve is seen by many commentators as a precursor of many market events. The yield on Government Securities tends to be higher the longer the maturity date of the paper. However, when the rates invert as they did yesterday, two- and three-year maturities yielding more than the five-year maturities, it is seen as a sign of a coming slowdown in the economy.

Traders also expect a similar fate for the two-year maturities versus the ten-year maturities today which will add to pressure on the dollar as this phenomenon may feed through into a pause in the hikes in official rates that have supported the dollar so far this year.

The proximity of the monthly employment report jamboree is holding traders back from committing to short dollar positions as the headline number can be hard to predict given the number of estimates in the data which often leads to revisions that can be as high as 30% in either direction.

The dollar index fell to a low of 96.37 yesterday but recovered to finish the day unchanged at 96.96 as the Euro failed to cling onto gains it had made.

Brussels considers unlikely expectations for the Euro

The European Commission will publish its blueprint for the single currency to challenge the dollar’s dominance as the global reserve currency later today.

The timing of the release may be a little odd at this time given the significant issues currently facing the Eurozone; social unrest, concerns over growth, and the political upheaval caused by Italy’s 2019 budget.

However, in time-honoured EU style, they will ignore the plight of the region and press ahead with plans to promote the use of the currency in “strategic areas”. The most significant of the these are energy, commodities and aircraft manufacturing.

While it may be difficult to insert the euro into these areas, the plan may receive support from those nations interested in “dollar bashing”, but history has proven that in times of stress the dollar always attracts risk-averse investors. Those same investors will reel at the thought of holding a currency where there is often an undercurrent about its long-term viability.

While this discussion continues, the day to day issues facing the Euro remain. The producer price data released yesterday was higher than expected which points to a rise in inflation down the line and with services activity data, due for release later today, expected to underperform market expectation, the ECB faces a difficult period.

The single currency rallied initially yesterday as the dollar index faced its own issues. However, it was unable to cling onto those gains and closed a little lower on the day at 1.1337.