Market casts off election shock fears

The pound rallied to its highest level against the dollar since early May and since February versus the euro as traders finally accepted that it is “probable” that the Conservative Party will be returned to Government at next week’s election with a working majority.

With the early days of campaigning dominated by fears of gaffes and accusations made against Prime Minister, it is the latest unscripted comments by Labour leader Jeremy Corbyn over terrorism, NATO and the Labour Manifesto that appear to be driving the latest polls.

Fears of a return to the union dominated days of the 1970’s and a hard-socialist Government appear to have created a “better than nothing” attitude to a Conservative Government.

Boris Johnson has and will continue to point the finger at Labour over Brexit where he was constantly stymied by Parliamentary chicanery designed to simply delay the issue.

Rejecting one Brexit deal may be considered prudence, rejecting two points to interference.

With a week to go, the pound’s ability to finally break through the 1.30 barrier may still be subject to negative shock but it points to the reaction there is likely to be should the election produce a definitive result. A break of the May high of 1.3170 would herald an eventual test of the1.4000 level should there be a result that means an end to Brexit uncertainty.

At the time when the market is usually winding down towards year-end, it is probable that volatility will spike to its highest level of the year no matter the result of the election.

There are no significant data releases for the UK either today or tomorrow, although it would take a seismic economic shock for the pound to be jolted out of its election focus in any case.

The pound made a high of 1.3121 yesterday versus the dollar closing at 1.3104. Against the single currency, it traded as high as 1.1831 closing at that level.

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NFP suddenly taking on greater significance

When does a correction become a trend?

A series of “misses” on the downside of recent economic data releases has set the dollar on a downwards path despite confident noises coming from the Federal Reserve.

Add in President Trump’s ongoing impeachment concerns and a less than stellar performance at the NATO summit this week coupled with continuing concerns over trade talks with China and what looks like a correction could easily morph into something more permanent.

The days of the U.S. labelling of countries “currency manipulators” with veiled threats of reprisals are now consigned to history and with trade taking on a more and more significant role, major trading nations fear the effects of a strong currency on their competitiveness even more than they fear the inflationary concerns of currency weakness.

Tomorrow’s final employment report of the year was supposed to be confirmatory signal to the markets that the “soft patch” for the economy was at an end, but it has now taken on a far more meaningful role. Should the data disappoint and that means a headline below +160k and the dollar could end the year on the defensive. The most interesting take away from that is that it would probably not concern the authorities or the administration if the dollar fell through the triple bottom at around 97.20.

The latest prediction for the headline NFP is +180k which is starting to look overly optimistic but as I said earlier in the week, a solid number close to that with a decent revision to the October data and the market will forgive recent soft data and the correction could be over. However, a significant miss and a marginal revision could see the “December ‘lull’ being cancelled this year.

Yesterday, the dollar index fell to a low of 97.41, closing at 97.62

Single currency considered a by-product

No-one in authority in the ECB or the EC Commission/Council appears to be focusing on the currency. While it is a truism to say that the level of the currency is dependent upon the state of the economy rather than being its primary driver, a feeling in the market that the currency is being either neglected or not likely to be defended tends to lead traders onto the attack and will attract the attention of the U.S. Treasury

Earlier in the year, President Trump in one of his “not so fine” moments, labelled Germany as possibly manipulating ‘their’ euro lower.

It is hard to find evidence of either the ability or the desire from the Bundesbank to see the single currency lower.

Despite the benign picture for inflation, the spectre of significantly higher prices still hangs over the country.

The wider region has no such concerns and it is mega-low inflation that is their major concern. This is just another signal of the difficult job Christine Lagarde faces in trying to stitch together some form of unity at the Central Bank

Today, GDP data will be released, and it will have a bearing on Lagarde’s first ECB meeting which takes place next week and will coincide with pan-Eurozone industrial production data.

The GDP is unlikely to prove to be pleasant reading. QoQ growth is expected to be 0.2% with the only good thing to be said is that at least it is positive. This will contribute to a YoY read of 1.2%.

While the GDP is a retrospective view of the economy, German Factory Orders, that will also be released today, provide a glimpse into the future and it may be chilling. Last month Factory orders fell by an annualised 5.4% this month that figure is expected to have worsened to 6.1% as the slowdown continues.

We have talked this morning about the pound and dollar potentially having a ‘lively’ end to the year. It is not likely that the euro will join the party with strong support unlikely to be tested but traders may lack the will to push the single currency much lower.

Yesterday, the euro closed finished virtually unchanged at 1.1079 having opened at 1.1080. It did, however, have a wider range than of late, trading between 1.1116 and 1.1066.