Euro likely to weaken further despite stimulus

The underlying structural, economic and political issues facing the Eurozone are unlikely to be solved by the addition of a new stimulus that was introduced following yesterday’s Central Bank meeting.

It was always probable that at the latest meeting something would need to be done to arrest the decline in activity that has been growing for the past six months.

The Eurozone economy has been caught in something of a perfect storm with domestic activity falling, global trade activity in decline, and the unknowns of Brexit still to come.

At his press conference following the meeting, ECB President Mario Draghi cut the Bank’s forecasts for growth through until 2021. Both the length of the guidance and the severity of the cuts surprised a market which was already primed for bad news. Interest rates will remain at historic lows until the middle of next year at least and the Bank will be making fresh loans to banks, already burdened by almost a trillion euros of bad debt, available to help drive borrowing.

The domestic issues facing the economy are not just rooted in financial matters. Cracks are starting to appear in the veneer of the single market and countries like Italy, Spain, and France are facing growing unrest political.

The forecast for growth this year has been cut from 1.7% to 1.1%. Even this may appear to be generous if the levels of activity do not improve.

The euro fell to its lowest level since last June versus the dollar, reaching a low of 1.1176 and closing at 1.1181. The longer-term target of 1.1000 is now firmly in the market’s sights and a lot now depends on tomorrow’s U.S. data releases (see below).

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Sterling continues to fall as a Brexit deal becomes more unlikely

Traders optimism, which bloomed briefly last week as a no deal Brexit was almost certainly removed from the table, has now almost completely dissipated.

There are stories emerging from Westminster that Brexiteer MPs are going to vote down the ”May Deal” at the vote, which it has now been confirmed will take place on March 12th, and press for support for a no deal conclusion. It is very doubtful that the UK will leave the EU on March 29th with no deal and it is now becoming more likely that it may not leave at all on that date.

It would appear that the strength of feeling over the current agreement will never change and a delay to Brexit will do nothing other than delay the inevitable which is now returning to no deal since that is, legally, the default position.

The complications over the European elections which are taking place in late May and have to be ratified by the first week of July means that any delay will be quite short-lived.

There has been an air of unreality, almost a sense that this is more an academic exercise but next week will bring the whole of Brexit into sharp focus.

Mark Carney, the Governor of the Bank of England, painted a more bullish picture of a no deal Brexit, commenting that the fallout may not be as severe as the Bank had portrayed in its last review which was published in November. Carney forecast a hit to GDP of 2% to 3.5% relative to the current deal while last November the hit was forecast to be between 4.75% and 7.75%.

Yesterday the pound fell to a low of 1.3068 and closed very close to that level. The 1.3000 level looms large again now. This has been seen as a pivotal point over the past few months, indicating trader’s optimism or otherwise over the entire Brexit outcome.

NFP takes on wider importance