Johnson’s determination winning through

Despite all the doubts, obstacles and dissent over the past months, it now seems that UK Prime Minister Boris Johnson is on the verge of winning his battle to see the country leave the EU (with a deal) by October 31st.

The financial markets certainly believe that he can pull off what would be an incredible achievement. The achievement wouldn’t be the fact that the UK is leaving the EU since that is what the people voted for, but in overcoming the way in which opposition has piled up from all sides disguised as concern over a no-deal scenario. It now seems that we will never get to find out just how serious no-deal would have been for the economy. Even Bank of England Governor Mark Carney has said that the deal that was agreed last week will be “net positive” for the economy.

As the negotiations in Parliament reach fever pitch with the Government publishing the white paper under which the regulations for the deal to be approved will be debated, Sterling rallied close to a six-month high versus the dollar. It reached 1.3013, the first time it has breached 1.30 since mid-May. It eventually settled back to close just eight points higher on the day at 1.2958.

Optimism that Johnson can win over doubters, supported by rebel opposition MPs and those former Government MPs who are now independent should see the pound remain well supported as the week unfolds.

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Dollar finding some support despite rate cuts expectations

The dollar index remains in a corrective phase despite finding a little support yesterday.

Hopes that there may be some positive news from the ongoing trade talks between Washington and Beijing underpin current support although overall the primary driver currently is the expectation that the FOMC may cut rates again at its meeting at the end of the month.

With data proving inconclusive, it may come down to a subjective judgement from the FOMC members as to just how weak they believe the economy can become and just how hawkish they feel about inflation. In truth, there is very little inflationary pressure seen in producer price data so that may be a deciding factor.

Recent comments from Fed members have been ambiguous, possibly deliberately so. Jerome Powell has tried to remain non-committal since the last meeting alluding to a desire to wait and see the effect of recent monetary policy changes.

Trump’s Chief Economic Advisor Larry Kudlow commented yesterday that tariffs scheduled to come into force in December could be cancelled if there is enough progress in trade talks. Despite stating the obvious, this is clearly a less-than-subtle attempt to pressure Beijing which is not likely to have any serious effect.

Both sides are at least making the right noises about a deal being found with the head of the Chinese delegation commenting that “the talks are being handled from a position of mutual respect” and the U.S. Commerce Secretary said that the “right deal is more important than a quick resolution”.

The dollar index remains close to its short-term target of 97.20. Yesterday, it reached a low of 97.15, closing at 97.32

End of an era as the “saviour of the Euro” retires

When he came into office, Mario Draghi appeared to be something of a compromise candidate for the role of President of the ECB. Eight years later he will leave the role with his reputation enhanced despite perhaps earning the undeserved epithet as being “the man who didn’t hike rates”.

To be fair to Draghi, his dovish posture has been proven correct especially at an institution that could never be accused of being soft on inflation.

At the time of his appointment, and in similar circumstances to now, the ECB wasn’t ready for a German President given how the region was reeling from the effects of the financial crisis.

His critics will point to the fact that the Governing Council were a little too conservative in their desire to stimulate the economy despite the continuing fall in inflation which gave them the opportunities to be far more creative than they dared. The withdrawal of QE may have been premature but only time will tell.

The new ECB President, Christine Lagarde, the second French holder of the role has benefitted from Angela Merkel’s desire to see Ursula von der Linden become EU Commission President. A couple of years ago, Jens Weidmann, the Bundesbank President was considered a shoo-in for the ECB role but concerns over Germans holding both top jobs saw Merkel shy away from supporting him.

Now, Lagarde, along with von der Linden, is faced with the task of structural changes that need to take place for the EU to survive in its current form. With the growth and stability pact now being unfit for purpose given its rigid restrictions on debt, changes, particularly to budget deficits are urgently needed to promote public investment while the private sector deals with its huge debt overhang and the banks absorb their bad loan portfolios.

Economically, the region is in recession in everything, but name and it will, no doubt, be a long hard winter. However, if a trade deal between Washington and Beijing can be agreed and tariffs on U.S. imports of EU manufactured vehicles can be avoided, 2020 could see the long-awaited revival.

Yesterday, the euro traded in a narrow range between 1.1138 and 1.1179, closing marginally lower on the day at 1.1149. With traders bracing themselves for activity data on Thursday, it is unlikely that the single currency will stray too far from its well-trodden path over the next 48 hours.