One of UK Prime Minister Theresa May’s bargaining points with the EU was removed yesterday as MPs voted in favour of a resolution that the UK should not leave the bloc without a deal. The original vote was to have been limited to not leaving on March 29th without a deal but an amendment which was supported by a majority of four means that, yet again, MPs let Brussels know what they don’t want, but still remain uncommitted on what they will support.

This evening there will be a vote to provide the Prime Minister with the authority to return to Brussels to request an extension in the execution of Article Fifty. This means that the UK would not leave on March 29th as had been planned.

The approval of such a request is by no means certain as it has to be ratified by every member separately. Brussels will no doubt want to know the purpose of such an extension and the length of the delay will be subject of much discussion.

With European Parliamentary Elections taking place in May (the EU will not want those to be overshadowed by Brexit) it is difficult to see what can be achieved in such a short time.

Sterling has been extremely volatile over the past few days but the markets overall concern has been over a no deal Brexit which it is uniformly agreed will be the worst of all outcomes for the economy.

Following last evening’s vote, the pound rallied to a high of 1.3384 from a low of 1.3060 earlier in the day. It has corrected a little overnight falling to a low of 1.3239 and remains fragile and reactive to further news.

It remains to be seen what happens next. The Brexit clock continues to count down and the law still states that Brexit will happen on March 29th with or without a deal. The next few days may add some clarity on the EU’s position over an extension but the entire Brexit issue still has a long way to run.

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Eurozone data confirms slowdown

Data for industrial production for the entire Eurozone in January was released yesterday and it confirmed what the markets already knew: the region is in the grips of a slowdown which while not yet a recession is clearly headed in that direction.

As the EU grapples with Brexit and what it will mean, the economy has turned from optimism over growth to concerns over its very existence. With elections in a little over two months, there will doubtless be candidates in several countries who raise the question of the very basis of EU membership and the benefits contrived from belonging to what is becoming a basically flawed institution.

There is still merit to the argument of strength in numbers but Germany, in particular, may start to question the benefit of its tacit leadership of a group which doesn’t want to be led. The ECB is hamstrung over its provision of support and its policy of providing more loans on beneficial terms could easily add to the bad loan provisions which are leading banks to withdraw behind national borders.

A prime example is Deutsche Bank in Germany. Long considered one of the most powerful financial institutions in the world, it is now retreating, taking its core business back to Germany and is being forced to consider a merger with Commerzbank in order to strengthen its own balance sheet.

The EU is clearly suffering from its desire to be the major global trading bloc but that puts it at the mercy of several outside influences. The continued slowdown in the Chinese economy is having a knock-on effect on global trade which in turn affects the Eurozone’s ability to export.

The single currency is on a long downward spiral which is only tempered by its reaction to the drivers of the dollar. The long-term target is still 1.1000 versus the greenback but it will not be a smooth fall. The inflationary effect of such a long decline should not cause further concern to the ECB but should the pace accelerate the Central Bank will be faced with yet another dilemma.

Yesterday, the single currency rallied a little versus a weaker dollar, reaching 1.1339 and closing at 1.1327.

U.S. data solid yet unspectacular

Following a fairly tempestuous 2018 which reflected the personality of the President, the outlook for the U.S. economy in 2019 has turned out to be more a reflection of the considered personality of the Chairman of the Federal Reserve.

Since traders have taken on board and basically approved of the Fed’s patient stance, markets have reacted in a very orderly fashion and data releases have provided support for Jerome Powell’s views.

Yesterday, producer price data was released for February and while it showed that inflation is not expected to be completely benign going forward, it is likely to remain controlled. Notoriously fickle durable goods orders were also released and they showed a surprising upturn from a fall in January.

One issue which may cast a shadow over the economy is the grounding of Boeing’s entire fleet of 737 Max aircraft following a crash in Africa. Boeing is a significant bellwether for the U.S. economy and should this develop further the effect will be felt across a wide swathe of U.S. industry.

Yesterday the dollar traded in a fairly narrow range between 97.00 and 96.38, closing at 96.47. The outcome of trade talks with China is likely to be the next major development to move the index out of its recent range, although given President Trump’s history, nothing is ever certain.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”

Tags:Daily Market Brief