While focus is on Brexit growth takes a backseat

Sterling staged a recovery on Monday, based upon three factors; better than expected services activity data, anticipation of the second stage of the Brexit debate passing through the House of Commons and investors willingness to forsake the dollar in favour of the pound.

Services activity returned to expansion as fears over a no-deal Brexit receded. Despite a slowing manufacturing economy (in congress with the rest of the developed Western nations), services are becoming the backbone of the UK economy. This is an area where the UK may not have total domination but certainly demands respect for its regulation, reputation and ability to broker and close deals.

The Brexit withdrawal deal will be debated today in Parliament with the potentially contentious clause under which the UK cannot extend the trade negotiations past 31st December set to be embedded.

The Opposition Parties will huff and puff, but they can no longer “blow Boris Johnson’s house down!”

While the UK and U.S. held talks over the renewed tensions in the Gulf region, it is clear that despite UK involvement in the region it will continue to be the U.S. that calls the shots without any feeling of need to consult its NATO allies, the UK in particular.

Yesterday, the pound reached a high of 1.3168, closing almost at the high as it recovered lost ground and remained volatile albeit in a relatively narrow range.

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Trump’s Schadenfreude may bring Iranian backlash

The dollar continues to be affected by multiple drivers both domestic and international as it starts the year in a state of flux. It is becoming ever more difficult to discern a trend for the greenback as traders sift through multiple factors.

Domestically, the economy is a matter for debate. While GDP grew by 2.3% in Q3 with a similar level of growth being predicted for Q4 there are several factors that may see the economy begin to slow as the year progresses.

Th consumer has been active in propping up an economy where manufacturing and industrial activity have been slowing. This slowdown is beginning to resemble a long-term shift in global economic activity. The rise of China as the global industrial powerhouse has left several previously powerful nations in its wake. China continues to have the capacity to add further expansion to its manufacturing base. While it may be glib to say that the East will be the global producer and the West the consumer, it seems an almost unstoppable self-fulfilling prophecy that that is what is going to happen.

The trade talks between China and the U.S. will begin again in the coming weeks/months against a backdrop of reality being somewhat different from what is being discussed. Having allowed its manufacturing capability to be usurped by a nation that has the low-cost base that first appealed to U.S. businesses who sent their manufacturing capability overseas, the momentum has shifted to such a degree that it is now impossible to reverse.

Rising corporate debt is a concern for the Fed as low interest rates protect borrowers but a major shock could hit the market if the Fed sees fit to hike rates. This won’t happen imminently but will be a topic of concern for Jerome Powell when he initiates a review of Fed policy in early H2.

The dollar remains affected by global issues with the situation in Iran seemingly on a knife-edge. It fell yesterday to a low of 96.54, closing at 96.62.

Eurozone may have to accept defeat over industry

The German economy which is a proxy for the Eurozone is exhibiting several characteristics of the U.S. as it continually loses out to Chinese activity as the reasons for the continued slowdown in industrial; and manufacturing production begin to bite and be considered as a systemic issue rather than a cyclical slowdown.

The decimation of British industrial activity in the seventies and eighties where production shifted to Europe is being mirrored across the Eurozone. It is questionable whether Frankfurt and Paris, as the two major services centres, will be able to wrest control of financial services activity from London in a post-Brexit world to be able to continue to keep their economies afloat.

The eurozone is on the brink of having to become a lot more protectionist in its outlook to ensure that the region survives. Several leading figures in the region, not least Ursula von der Leyen have called an improvement in trading links between members while the Economics Commissioner demanded that nations with a budget surplus do more in order to allow the weaker debt-ridden nations time to repair their economies.

It has become a question of will and the motives behind nearly every nation joining the expanded EU. The weaker nations felt that paying the price of giving up “economic sovereignty” was acceptable in exchange for the security of their markets and the support that economic stability gave them. The stronger nations (Germany) believed that in order to expand economic dominance to political power they needed to provide support.

Now, nearly every nation believes it has gone far enough but the economic model is demanding closer unity with fiscal union becoming a necessity.

The single currency, stuck in the middle of the entire concoction, trades in an ever-narrowing range often driven by factors outside the control of the Central bank.

Yesterday, it traded between 1207 and 1.1157, closing at 1.1193.