A defining week begins

After what seemed like an eternity, the General Election will take place in the UK this Thursday. In a week that includes an FOMC meeting and Christine Lagarde’s first ECB meeting the election towers above the market’s as the future of the UK both politically and economically are defined by years to come.

Politically, should the Labour Party, the main Opposition for close to ten years following a record term in Government, fail to find itself unable to win an election where the Governing Conservative Party have been at their most divisive since the “Thatcher years” then it will need to reinvent itself (again) as its “old-style” left wing policies are clearly outmoded in today’s less “industrial” society.

A defining victory for the Conservatives will be the only result that ensures Brexit will take place at the third time of asking. The current deal negotiated with Brussels is far from perfect, but it allows the country to move forward.

Last week, Sterling had its highest close against the dollar since the first week of May, while it closed at its highest level against the euro since April 2017.

Where economics and politics merge somewhat is clearly that while polls favour a working majority for the Government, a Brexit settlement is what traders desire more than anything.

The pound closed at 1.3167, having started the week grappling with significant resistance around 1.30. Against the euro, it fared even better, reaching 1.1889, closing just a few pips below that level. The next targets are 1.3220 and 1.2000 respectively.

While economic data is unlikely to have any major significance, it is expected that manufacturing output, to be released tomorrow, while still contracting, will have shown an improvement from -1.8% to -1.5%

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Pressure on FOMC vanishes

Friday’s November employment report for the U.S. had the potential to be all things to all men”.

The economic bears had predicted another weak report following October’s addition of just 128k new jobs, which would have pressured this week’s FOMC meeting into reconsidering its bold (for it) announcement that rates would remain “on hold” for some time to come.

The bulls (those in the “Powell camp”) saw recent economic reports as denoting little more than a “soft patch” in growth and this data would be confirmation of that fact. There was even something for the “fence-sitters” who saw this report as being synonymous with recent inconclusive data showing that the economy was in danger of a continued slowdown unless a deal with China on trade could be struck.

In the event, it was the bulls who won this time, with the stunning addition of 266k new jobs, well above market estimates of 180k. The October headline of 128k was revised upwards significantly, but even at +156k its still signified an outlier from recent numbers..

The dollar rebounded from the lows it had reached over the previous week or so. The index closed on Friday at 97.67, still lower than the previous week, but safely above significant support at 97.20. In the immediate aftermath of the data, it reached a high of 98.38 as stop losses were triggered but traders still took the opportunity to sell given that this result needs to be confirmed by activity and other data before the market can accept the ”soft spot” theory.

This week’s FOMC meeting will now leave rates unchanged but the testimony from Jerome Powell following the meeting will provide an interesting backdrop to the numbers.

Lagarde to try to energize ECB

Every Monday, it used to be easy to write that “this could be the week”. The week when the data starts to turn around and the market starts to see the first shoots of an economic recovery.

Now we seem to have succumbed “doldrums effect” where every week seems the same as the winds of recovery refuse to blow.

However, this week we have a significant change to one major detail. The ECB has a new President and she has been considered as the person who will forge stronger links and be able to facilitate a political solution to the issues facing the eurozone where it has failed through both economic and monetary policy.

Christine Lagarde, and the new EU Commission President Ursula von der Leyen are charged with the role of convincing a dubious Parliament that greater integration is the solution while increasing region-wide consumption via internal activity will provide growth.

Von der Leyen will approach the issue from a political angle promoting the idea that standing still is going backwards while Lagarde will confirm that there is no alternative since every tool in the ECB’s cupboard has been exhausted.

If they fail in the mission to promote greater fiscal union through unified tax, social welfare and regulatory reforms the fate for the EU looks bleak.

Last week, the euro danced to the dollar’s tune. Its strength was due entirely to a weaker dollar and when the turnaround came following Friday’s U.S. data, it was the euro which suffered the most.

It closed the week at 11060, having risen earlier in the week to 1.1163. .