Bank of England warns over Brexit delay

The market’s continued desire for the UK to leave the EU with a deal was again illustrated yesterday as the pound rallied to a two-month high on the back of comments from European Commission President Jean-Claude Juncker that he “thinks Brussels can have a Brexit deal”.

It is a measure of the market’s desire that even a very vague comment such as this can lead to short positions being trimmed (no one is yet brave enough to be net long of Sterling). Traders will become more intrigued by developments as the clock continues to count down with further milestones on the horizon.

The High Court in London finished hearing evidence yesterday regarding the legality of Boris Johnson’s suspension of Parliament.

The Judge, aware of the time-sensitivity of the case, promised a verdict early next week. With the Labour Party Conference starting this week and the Conservatives the following week, this has turned into far more of a symbolic action, not something that will change the Government’s actions That is since Parliament would be unable to reconvene before October 7th, it would be just one week before the suspension was due to finish.

The Bank of England Monetary Policy Committee met yesterday and as expected, interest rates were left unchanged. In an effort to break the air of indifference which currently surrounds the Bank, Mark Carney, the current Governor, (he will leave the post in January), commented that he believes that any further delay in Brexit would harm the economy of the nation more than it already has.

Estimates for quarterly growth were left unchanged despite the MPC acknowledging that growth between July and September fell from 0.3% to 0.2%. Carney also warned that interest rates are likely to “stay lower for longer” although he made no mention of the Bank’s opinion on joining in the rate cuts that have taken place in the U.S. and Eurozone.

The pound’s rally versus the dollar took it to a high of 1.2560 and it closed at 1.2522. It has continued to rally overnight moving back towards yesterday’s high.

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Fed’s lack of clarity concerns traders

As is seen in several other fields, markets are used to taking a lead from the actions of the U.S.
Under Fed Chairman Jerome Powell, traders have been left, to a certain extent, to their own devices with the FOMC acting almost on a meeting by meeting basis in deciding monetary policy.

It is now being questioned whether “flying by the seat of its pants” the Fed is making, what the market believes to be the correct judgements, by luck.

In his press conference on Wednesday evening, Powell reiterated that the markets see the same data as the Fed so should be able to understand the Fed’s actions. He also commented that the committee’s base view is that the economy will “remain strong” and the rate cuts that have been seen recently are merely mid-cycle adjustments.

Traders are unanimous in the view that monetary policy cannot be decided on a meeting-by-meeting basis or even quarter by quarter since there are anomalies in every set of figures. Data dependency is not something that can be adjusted with every new employment, inflation or industrial activity report but it seems that the FOMC is unable to agree on what the trends in data mean.

Following his rant in the wake of the FOMC meeting, President Trump was asked yesterday if Powell’s job was safe? He replied “sure, why not?”, which will hardly have filled the Fed Chairman with confidence.

The dollar index remains driven by several factors. Yesterday, it fell to a low of 98.20, rallying later in the day to close at 98.58.

Euro unable to break the shackles

The single currency remains under a cloud of disappointment. On days when it rallies, even in reaction to a fall in the dollar index, it is unable to break above virtually any resistance level since traders take every opportunity to sell into such opportunities.

The general malaise which surrounds the Eurozone economy has been exacerbated rather than relieved by last week’s monetary policy actions by the ECB. If there is any positivity to be had, it is found in the fact that the single currency is managing to remain above the pivotal 1.10 level versus the dollar.

Whether the dollar is being devalued by word (Trump) or deed (Powell) it is conniving to keep the euro in a narrow range.

Today sees the release of consumer confidence data for the region. Market expectation is for it to have marginally improved from last month although it remains solidly in negative territory.

Activity data will be released next week with the influential Markit reports on manufacturing and services activity being released for Germany and the entire region.

In Germany, a slight fall in manufacturing is expected, dropping from 43.5 in August to 43 this month. Services activity continues to expand. This is the only activity which is keeping Germany from falling further into a recession, although it is expected to have weakened slightly from 54.8 to 54.

For the region, manufacturing activity is also in a period of contraction. This is expected to continue to weaken, falling from 47 to 46.3.

The single currency had a better day yesterday versus a weaker dollar. It rose to a high of 1.1074, closing at 1.1040 as the dollar recovered.