PM asserts promise to leave before the next election

It seems an odd tactic to try to keep your job by promising to leave it soon on your own terms.

Theresa May, the UK Prime Minister, reiterated her promise yesterday that she would leave the job in time for a new leader to be in place well before the next election which is due to take place in 2022. However, the current Government may not reach that date if it is defeated in the vote on the Brexit agreement which must take place before January 21st. If/when the Government loses that vote, opposition parties are sure to table a motion of no confidence in the Government.

Yesterday Mrs. May was in Brussels looking for support from the EU. Her lack of alternative measures, should she fail to gain support, is counting against her as the Presidents of the EU Commission and Council have confirmed that the deal on offer is the best that can be achieved.

The Prime Minister’s conciliatory tone towards Brussels is losing her support at home as supporters of Brexit call upon her to toughen her stance and warn of the consequences of a no deal Brexit for all parties. While there is no majority at Westminster in favour of no deal it may happen by default if no agreement can be reached over the wording of the backstop.

The farcical suggestion was made yesterday that if the EU cannot agree to an end date for the backstop, perhaps they will agree to the start date for the “new relationship” which hasn’t been agreed yet. Playing with words is unlikely to solve this issue with Brexiteers and Remainers as far apart as ever.

The pound recovered from its precipitous fall earlier in the week as weak short positions were liquidated. It reached a high of 1.2687 versus the dollar closing at 1.2664. Having been repelled at the important 1.1000 level, Sterling also recovered against the single currency, reaching a high of 1.1170, closing at 1.1144.

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ECB both dovish and hawkish

The desire of the Central Bank to “normalize” monetary conditions despite the concerns over the Eurozone economy going forward, led it to confirm the withdrawal of the Asset Purchase Scheme which is seen as a tightening measure, while at the same time lowering its forecast for inflation in Q1’19.

This hawkish yet dovish stance sums up perfectly the issues facing an institution trying to manage monetary policy for such an economically and socially diverse region as the Eurozone.

While pointing to the U.S. as a template for a coming together of individual States to create a single nation, the EU risks falling short in its ambitions by walking before it can run. While having survived the financial crisis is a huge achievement for which Mario Draghi should be congratulated, merely surviving will not allow the expansion needed to provide a more stable base on which a further integration can be built.

Yesterday, Mario Draghi, who is now in his final year as ECB President, confirmed the end of the Eur 2.6 trillion programme of quantitative easing even though it has failed to provide the momentum required to provide sustained growth.

Draghi also lowered his expectations for inflation which is already struggling to stay above 1% and creating fears of deflation in the region which could set it on a similar path to Japan which continues to struggle with a deflationary spiral.

The single currency remained in a narrow, and narrowing, range versus the dollar trading between 1.1393 and 1.1331 before closing virtually unchanged on the day at 1.1364 just seven pips lower on the day, as nothing Sr. Draghi said was news to the market.

Dollar gains as FOMC looms

The dollar has, without a doubt, been the star performer of the currency markets in 2018, almost despite itself.

The year began with a disagreement between the President and the Treasury over “official” dollar policy with Secretary Mnuchin calling for a weaker dollar to boost exports while President Trump, for reasons he typically never got around to explaining, likes a stronger greenback.

Then, Trump took the unprecedented step of replacing a senior and well-seasoned Central Banker in Janet Yellen with a lawyer in Jerome Powell. So baffled was the market over the decision that rumours spread that Yellen was replaced because she was “too short”!

Powell was expected to bring a lawyer’s perspective to the role, look at the facts and be more driven by what was happening to the economy rather than what may happen. In the end, he has surprised many people with his more hawkish persona, hiking rates three times already this year with one more to come. This has angered the President who has at times ridiculed the FOMC for its actions, causing some observers to be concerned over the Fed’s jealously guarded independence.

The dollar has risen throughout the year almost by default as the interest rate differential with other G7 economies has widened.

Next week’s FOMC meeting is likely to see a fourth rate hike for the year but it is the economic projections that will interest traders the most. With the ECB maybe not changing monetary policy at all in 2019, if the Fed remains hawkish the dollar may continue to rally.

Yesterday, the dollar index reached a high of 97.30 although in the end, it closed virtually unchanged at 97.08.