Election concerns fail to halt pound

In what is being labelled the most unpredictable election in a generation both the ruling Conservative Party and main opposition Labour Party typically each see themselves as the only ones who can lead the country to prosperity and deliver the Brexit it deserves.

Prime Minister Boris Johnson yesterday lamented the fact that he was unable to engineer the UK’s departure from the EU yesterday as he had promised. In a somewhat unfair speech opening the Labour Party’s election campaign, Jeremy Corbyn laid the blame solely at Johnson’s feet. Johnson has been unfortunate that he has not been the leader of a majority Government during his entire Premiership so has had virtually no chance to deliver although he was perhaps reckless in making promises he was patently unable to fulfil.

Despite the uncertainty surrounding the election, Sterling remains on the front foot as the vote is expected to provide something close to closure. Were there to be a hung Parliament, the pound would no doubt suffer but for now there is an air of optimism around the currency.

Following the approval; of Parliament of the draft Withdrawal Agreement, even though Johnson was unable to push through his timetable, the fact that there is an agreement that Parliament can live with gave a boost to Sterling which saw it gain the post in a single month in a decade.

Yesterday, it fell short of the 1.30 level versus the dollar, making a high of 1.2976, closing the month at 1.2937. This is its highest monthly close since May.

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Slowing economy to drag Greenback lower?

It is a confusing time for investors or those trying to hedge exposure to the dollar. The Fed is guilty of sending out mixed messages as it tries to ensure that it provides a solid platform for the economy to perform.

This week’s cut in short-term interest rates, the third this year, was announced almost reluctantly. It felt like Fed Chairman Jerome Powell was close to apologetic in his announcement and he seemed to regret the need to cut, even giving the impression that it was an admission of failure.

In the lead up to the FOMC meeting analysts and commentators had very little by way of advance guidance upon which to base their thoughts on the Fed’s likely path. In the end, the cut when it was announced wasn’t a complete surprise although the context of comments made at the time of the previous cut make the reasoning odd.

Comments made by FOMC members in the lead up to the previous cut seemed to point to it being something of an insurance against the “soft patch” continuing longer and/or being deeper than the Fed’s economists predicted. That hasn’t really transpired in the intervening period, yet the committee felt the need to cut again.

It is entirely possible that rates have been cut, which in a global context may prove to be the correct thing to do, but for the wrong reasons. Only time will tell.

Today sees the release of the October Jobs report. It is unusual for the data to be ready for release in the first day of the new month. In these circumstances, traders usually must wait an extra week to be a party to the number which usually sets the tone for the entire month. Given the fact that it will be released today, there is more scope for estimates in the data which will lead to larger revisions next month.

Analysts are quite bearish about the headline NFP which they estimate will fall to below +100k new jobs created. The latest estimate is for just 85k.

If this is proved to be accurate, the dollar’s recent correction is likely to continue with support at 97.20 already under pressure. Yesterday, the index fell to a low of 97.22, closing at 97.32. Overnight, that level has been tested again, but so far (05.30GMT) it has held firm.

Data surprises to the upside

There are two “golden rules” that traders live by. The first is to “not get married” to a position and the second is to be aware of not being too bullish near the perceived top of the market or bearish near the bottom. Traders in the single currency had been in danger of becoming conditioned to expect poor data and were guilty of a preconceived notion that the poor run of data would continue.

They were, therefore, unprepared for yesterday’s inflation and growth reports both of which were stronger than analysts had anticipated.

During his time a s ECB President, Mario Draghi seemed to always be waiting for a pickup in inflation as the prelude to the expected (by him) turnaround in the region’s fortunes. It would be ironic if this came just when he had left the role.

Inflation data for the entire region was released yesterday. It showed that core prices increased by 1.1% last month versus an expectation of just a 1% increase. The Q3 GDP estimate was also released and while it didn’t really surprise traders, there was a sense of relief that the data was in line with expectations.

Christine Lagarde officially took up her role as President of the European Central Bank yesterday and was immediately on the front foot. She was more forceful in her first speech about the need for fiscal unity in the region than Draghi was in virtually his entire tenure.

She also went on to call upon those nations with large budget surpluses to invest more in infrastructure and social projects as a method of stimulating activity. As a taste of the proactivity we can expect going forward, we can expect a more “involved” ECB. In the “Draghi years” the ECB clearly saw itself as reactive to the “hand it was dealt” while Lagarde clearly wants the Bank to be at the forefront of the recovery as and when it arrives.

Yesterday, the single currency rose versus a weakening dollar. It reached a high of 1.1175 but fell back to close at 1.1153. Traders clearly do not see one “data swallow as making a summer” and will need more than one set of positive data and a more aggressive Central Bank to be convinced.