Three years and still nothing firm!

October was always going to be a volatile and unpredictable month for Sterling!

So it is proving as traders are tugged first one way then anther by rumour and counter-rumour. Rather bizarrely, the one constant over the past few weeks, despite his tribulations, has been Boris Johnson’s certainty that a deal is going to be concluded for the UK to leave the EU by the end of the month.

Johnson’s revealed plans for Ireland yesterday which include customs posts to be placed inside the borders and be so unobtrusive as to not hinder the passage of trade. This is a rehash of an old idea but with various other concessions from both sides, a deal will at least be able to be put before the EU Summit in the coming weeks.

There has been a rumour today that the EU may be prepared to put a time limit on the backstop (which Johnson wants to be removed completely) which may satisfy Parliament. It would be ironic if, after three years of wrangling between just about every party with an interest in Brexit, that a deal is done and suspension of Parliament, votes of confidence, General Elections and numerous political casualties were all for nothing.

If Brexit does occur on 31st October, the opposition parties won’t be able to agree to an election soon enough, but it may all prove to be too little too late if the Government finally delivers.

The market remains volatile, but Sterling has been pressured by the rumours that Brexit may finally happen. It fell to a low of 1.2205 in what looked suspiciously like a “flash crash” may be developing by managed to recover as weak data pushed the dollar lower (see below). It closed at 1.2306.

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U.S. Manufacturing activity at its lowest for ten years

The Fed’s mid-cycle adjustment took something of a hit yesterday as manufacturing output not only fell further into contraction but was at its lowest for ten years. It may be that President Trump foresaw this happening and was correct in his desire that short-term interest rates be cut more than the Fed has so far seen fit to allow.

This Friday’s employment report will now take on huge significance with anything lower than last months +130k new jobs created changing the market’s mind that the Fed would delay any further cut until the effect of the two previous cuts has fully been felt.

Earlier in the day, the dollar index had continued to rally as rumours circulated that German growth estimates were about to be cut (see below). However, following the rise to 99.60, it fell back following the data to close at 99.15.

Several commentators are now calling a top for the dollar index despite the weakness of its constituent parts, the U.S. economy may finally be succumbing to the multiple factors providing weakness in the global economy.

Manufacturing output fell to 47.8 this month from 49.1. Market expectations had been for a marginal rise into expansion having been prepared to overlook contraction in August. However, consecutive falls will certainly attract the interest of FOMC members, who, by their own admission, act on trends rather than single pieces of data.

With two minor employment reports and services activity data all being released prior to the NFP on Friday, the dollar could retreat further irrespective of activity on the other side of the Atlantic.

Rumours of growth cuts keep the euro under pressure

It may one of the least unlikely rumours to be heard so far this year given the data that has been released recently, but a story was circulating yesterday that the two most influential forecasting groups in Europe; ZEW and Markit, are both expecting forecasts for growth in Germany (and therefore the Eurozone) to be lowered in the coming days.

Given the truly horrendous activity data released by Germany last week, it is hardly a surprise that the economy will be confirmed as being recession when official Q3 GDP data is released.

The market is far more interested in how the Eurozone can dig itself out of what many consider to be a self-inflicted hole.

The coming recession has grown in strength rather like a hurricane over the past few months with the ECB at first predicting a slowdown, then a short-lived and shallow recession to where we are now where it is anyone’s guess as to just how bad it could get.

There are some who see the current situation as a threat to the very existence of the Eurozone. While that may be overly dramatic, the fact that although other major economies are slowing, the fact that the situation in the region is fast becoming as serious as the Financial Crisis (from which it could be argued it never fully recovered) adds credence to concerns over structural issues which could be unsolvable.

Yesterday, the euro had a mixed day buffeted by rumours but supported, to an extent, by a weaker dollar. It reached a high of 1.0942, closing at 1.0932, staving off if not fully rebuffing an anticipated test of support at 1.0840.