Was February a blip?

A question that has been on the mind of FX traders for the past month is set to be answered today; was the poor employment data for February an outlier or has the creation of new jobs slowed sufficiently to halt the FOMC’s “normalization” of short-term interest rates completely?

Fed Chairman Jerome Powell, in the role a little over a year doesn’t yet command the respect of the market as a Bernanke or Greenspan did and that is only to be expected given his background in law rather than economics. The entire dynamic around the Fed’s expectation for the economy has changed with traders driven by fact rather than relying on advance guidance.

Last year’s criticism of Powell by President Trump for raising interest rates too quickly almost drove the market to support the Fed’s actions given its scepticism over the President’s grasp of the economy. However, the subsequent slowdown in economic activity has illustrated that the truth of the matter, as is often the case, lies somewhere in the middle. The economy was starting to show signs of overheating following Trump’s tax cuts, but the global slowdown has led the four hikes in 2018 to appear excessive.

Today’s release of Non-farm payroll data for March is expected to show a return to close to the recent average with between 160k and 180k new jobs created. But there will be a lingering concern that the 20k new jobs created in February were a sign of things to come.

The risk is clearly to the downside for the dollar index since a number close to the average will confirm the Fed’s recent comments while a similar return to February may mean that the Central Bank will need to take further action.

Yesterday, the dollar index traded in an almost identical range to the previous session as traders were wary of taking on new positions. It reached a high of 97.34, closing at 97.31.

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Euro basing despite lingering fears

There is a growing feeling in the market that the worst for the Eurozone economy has been seen. While any recovery is likely to be slow and not without risk it is possible that the single currency has reached its medium-term low.

Any rally that is seen for the euro may be something of a default position as improving global risk appetite following optimism over a trade deal between the U.S. and China leads to a weaker dollar.

Recent falls in economic activity both for individual members and the region as a whole have led to a view that things can only improve, particularly in Germany where spare capacity is at its highest following yesterday’s release of the weakest factory orders data in two years.

One lingering concern is the rumour that Italy is about to announce a cut in its growth estimate for this year and next. If this is the case, it is probable that traders will view this as far from unique and will expect similar stories for France and Spain whose economies are in a similarly fragile state.

While economic activity is going to remain sluggish at best and a recession is expected, the length and depth of the downturn is the major question. The ECB continues to be optimistic that it can provide enough stimulus through additional liquidity to encourage banks to lend. There remains a concern that it doesn’t have the tools to cope with a long recession which could take years rather than months to recover from.

The single currency followed the dollar and traded in a 1.1249/1.1205 range yesterday, closing slightly weaker in the day at 1.1222

Long Brexit delay now a real possibility

Following this week’s vote in the House of Commons where MP’s passed a motion ruling out no deal by a majority of one, it seems that a long delay to Brexit until the end of the year, at the earliest, is now becoming difficult to avoid. With the European Parliamentary elections taking place next month it is becoming inevitable that Britain will be forced to take part.

The reaction of the people of the UK to any election is going to go a long way to confirming the country’s reaction to the fallout from how Brexit has been handled.

There are local elections taking place in the first week of May and while there is a traditionally low turnout it is expected that independent candidates will do well as the electorate protest at the way the major Parties have handled the UK’s departure from the EU.

Yesterday, Donald Tusk, the President of the European Council, hinted at a flexible departure date, where the UK could leave the EU as soon as a deal was agreed. The major issue remains that Brussels continues to see “May’s deal” as the only possible way in which the UK will leave despite it being voted down by MPs three times.

The cross-party talks initiated by Prime Minister Theresa May this week continued yesterday and while there has been no official comment on the outcome, the sheer length of the discussions is a fair indication that a consensus is being hard to achieve.

This entire change to the Prime Ministers approach has confirmed a significant split in both the Cabinet and the Conservative Party where critics see the involvement of the Opposition as a confirmation of failure.

Even though no deal has theoretically been taken off the table it is still possible that the UK could leave the EU as soon as next Friday without an agreement. While that now seems unlikely and a second referendum, despite growing support, probably doesn’t command a majority of MPs, a long delay is now a real alternative.

Sterling has become almost immune to the daily Brexit news as traders appear to have decided to leave Parliament to its own devices and retain their mantra; no deal bad, long delay good. That is, of course, speaking for the economy, not necessarily the demands of the public.

Yesterday, the pound traded, in concert with other majors, in a band between 1.3192 and 1.3060 versus the dollar, closing at 1.3076. This has now become a familiar range and it will take some concrete Brexit decision making for it to be shifted significantly in either direction.