Sterling unmoved as traders await Brussels response

U.S. Prime Minister Boris Johnson finally unveiled his long-awaited plans to break the logjam over Brexit and secure a deal for the UK to leave the EU at the end of the month.

So far, the reaction has been muted from just about every corner, with the UK press unable to agree if it is sufficiently different from Theresa May’s original to gain either support from Parliament or appeal to Brussels.

When delivering the details of the plan, Johnson continued to threaten that should Brussels fail to compromise the UK would be leaving without a deal. This has now become something of an empty threat since the Government continues to assert they will not break the law which was recently passed in Parliament.

As it now stands, ten days of intense negotiation will take place between London and Brussels prior to the EU Summit. If the EU fails to agree on a plan, Johnson is then bound by Parliament to ask for an extension until 31st January next year; something he has vowed not to do.

The cornerstone of Johnson’s plan is for Northern Ireland to remain within the single market but not the customs union. This means there will need to be border checks although these will not hamper the free movement of goods between the two sides of the Island of Ireland. This effectively removes the backstop agreement.

The Parliamentary Opposition Parties face a difficult time over the coming days as they will be under pressure to agree Johnson’s plans. Since he has complied with their wishes, any further delay could be seen by the electorate (leave or remain) as simply obstructive.

The pound barely reacted to news of the plans with traders preferring to “keep their powder dry” It traded between 1.2324 and 1.2269 against the dollar, closing at 1.2298 just nine pips lower on the day.

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Global stocks fall as U.S. economy seen weakening considerably

The long-held belief that the U.S. was going to “buck the trend” and continue to grow despite a slowing global economy is beginning to falter.

Activity data released recently has shown the output is falling into a deeper contraction while yesterday’s data for the business climate was appreciably weaker than the market had expected.

While the drama of impeachment proceedings against President Trump is yet to have any significant effect, the economy is beginning to show signs that the current downturn turn is more than a mid-cycle adjustment as it has been described by Fed Chairman Jerome Powell.

Yesterday’s data showed that business conditions fell from 50.3 in August to 42.8 this month. The market had expected a moderate fall, but this indicates a more serious concern that the economy needs more than just “insurance” from the Central Bank. The chances of another 25bp cut in rates at this month’s FOMC meeting have been greatly increased.

The ADP jobs report on the private sector was also released yesterday. While the headline was lower than market expectation coming in at +135k versus an estimate of +140k, it was the revision to August’s data from +195k to +157k which spooked the market ahead of tomorrow’s NFP report.

Estimates for the Non-farm data are being cut with +120k now the median.

The dollar index retreated further from its recent highs, making a low of 98.96, but clinging to the 99 handle, closing at 99.03.

WTO gives green light to U.S. tariffs on EU exports to the U.S.

As the global economy slows a new era of protectionism appears to be dawning with the WTO yesterday giving approval to the U.S. to apply tariffs to $7.5 billion of imports from the U.S. While this figure is dwarfed by the value of the tariffs placed on imports from China it is almost as significant given the trade relationship between the Eurozone and the U.S.

The EU’s trade surplus with the U.S. puts it in a weak bargaining position since it is unable to match America’s actions and the tariffs will offset any benefit that is gained from a weaker euro.

While this is a further blow to the Eurozone economy, it has become obvious to the market over the past few months that the economic issues facing the region must be solved from within.

Longer-term, the economy must find a way to insulate itself from global shocks by pushing forward the intra-state trade that the EU was designed to promote. Following the financial crisis which hit individual countries of the Eurozone disproportionally hard, and the current downturn which has no obvious conclusion, Brussels is at a crossroads.

The issue is no longer able to be brushed aside, disguised by the benefits of commonality, the growth of nationalism is making further integration far more difficult to achieve with several nations firmly against any move towards Federalization.

The euro remains in a narrow corridor buffeted by market reactions to events in the U.S. It attracts sellers on any move above 1.10 versus the dollar while, for now, the 1.0840 support level remains intact. Yesterday, it traded between 1.0903 and 1.0963, closing at 1.0960 as the data was released and digested in the U.S.