Traders prepared to give Sterling the benefit of the doubt

A General Election breeds uncertainty in financial markets and traders hate uncertainty. Uncertainty does have one benefit however; in that it also creates volatility and traders enjoy volatility since volatile markets provide opportunity.

Since the election was called last week, Sterling has been well supported, surprisingly so. Commentators see this election as too close to call and it has been labelled “the most unpredictable in a generation.

The current Parliament rose for the final time yesterday as the election campaign got under-way officially although we could all be forgiven for believing that the campaigning has been going on for weeks, if not months.

So why hasn’t the pound had fallen back to the bottom of its range considering that in five weeks’ time it is entirely feasible that the City’s biggest fear, a Labour Government, could easily happen?

Socialists are the Party of higher taxation, public spending and debt. It may be that an outright Labour victory is seen as the most unlikely of the most popular theories on the outcome with a hung Parliament or a narrow Conservative majority the two most popular.

It could also be that the market is suffering so badly from “Brexit fatigue” that any action that could break the logjam is seen as a positive.

The “third” Party, the Liberal Democrats have ruled out putting either of Boris Johnson or Jeremy Corbyn into power, preferring to advance their anti-Brexit credentials by holding the balance of power in a hung Parliament. One further reason that their leader, Jo Swinson is loath to enter any coalition is the experience her Party had in 2010 when the coalition was a spectacular failure from their point of view.

As the election campaign gets properly underway, there will be the usual deluge of opinion polls and should there be any upswing in support for Labour and a majority in their favour become more possible it is very likely that the pound could see a serious correction.

Yesterday it traded in a now familiar range between 1.2917 and 1.2859 versus the dollar, closing at 1.2886

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Market confident of Washington/Beijing agreement

The dollar remains well supported as traders are beginning to come around to the view that the economy is not going to suffer a serious slowdown and the news that the FOMC is pausing in its current cycle of cutting rates is fully justified in its caution.

There are two reasons for the dollars’ “bid tone” First, there are strong rumours of good progress in trade talks between Washington and Beijing, possibly even a growing belief that a deal is about to be announced. Given the number of false dawns that have been seen over the past few months it would be wise to be cautious although the traditional safe haven currencies, the JPY and CHF, are on the back foot. The Greenback is close to its October high versus the JPY in particular.

The second reason for optimism is positive economic news as data released yesterday showed a relatively buoyant economy. One report on non-manufacturing or services activity was appreciably stronger than market expectations while the other was in-line, but it was the significant improvement in the trade deficit that got most attention from traders. The deficit fell from $55 billion in September to $52.5 last month.

It is possible that the dollar index will remain supported for the rest of 2019 now as monetary policy and economic activity both provide support. However, today’s data may not be quite so supportive as unit labour costs are expected to be weaker than of late leading to benign inflation although this will have little influence on the outlook for short-term interest rates.

The dollar index continued to recover from its recent correction yesterday, reaching 98.02 and closing at 97.92

No recession even with weaker growth

It has been a feature of the recent downturn in economic activity in the Eurozone that successive senior officials have tended to paint a more glowing picture that has been the case. That was certainly true of ex-ECB President Mario Draghi who always tended to see the next piece of data as being the turning point.

Since Draghi’s departure, the Head of the European Stability Mechanism has taken up the optimistic mantle.

Yesterday, Klaus Regling argued that the slowdown that has been seen throughout the Eurozone this year doesn’t necessarily point to a recession beginning in this quarter or the next. This is far from the markets base view particularly since growth has fallen from 0.4% in Q1 to 0.2% in Q2 as we await the data for Q3 with a degree of trepidation.

Regling is responsible for the funding of those Eurozone economies who find themselves in difficulties. He was speaking in Cyprus yesterday as the Country tries to avoid drowning under the weight of NPLs.

At the ECB, new President Christine Lagarde faces a surprisingly divided Governing Council that has become split along national lines as those countries with more profligate Finance Ministries justify calling for relaxation of the growth and stability pact. Lagarde faces the difficult task of trying to promote economic activity while remaining a responsible Central Banker at a time when more radical policies are the only viable solution to the issues facing the region.

It remains to be seen if Regling’s optimism will be justified but for now, that seems highly unlikely.

Yesterday, the single currency fell to a low of 1.1063 versus a strengthening dollar, closing at 1.1071.

Today sees the release of German Factory Orders with the market fearing more bad news. This places the risk to the upside. Eurozone retail sales data will also be released with an improvement from 2.1% in August to 2.5% in September expected.