May continuing to battle for her plan

UK Prime Minister Theresa May has set next Tuesday, January 15th, as the date Members of Parliament will finally get to vote on her draft agreement with Brussels for the UK’s departure from the EU.

She continues to try to convince both Parliament and the British public that what she has agreed with the EU negotiators is the best and only deal available. While she refuses to accept that the vote will go against her next week, there are several initiatives continuing that prepare the country for a no deal Brexit.

The major post-Brexit concerns centre around medicines, with the Health Minister assuring the country that there will be no issue, no matter what the outcome is on March 29th, and transport with a “dummy run” taking place at Channel ports starting yesterday, where there was speculation about long delays.

The pound has consolidated itself above support at 1.2720 versus the dollar and 1.1075 against the single currency as the market is prepared for nothing new to come from the Parliamentary debate taking place in the runup to the vote. The bulk of trades being done now are commercial orders mostly from those who need, rather than want, to be involved.

Yesterday, the pound remained in a narrow order driven range versus the dollar. It reached a high of 1.2787 and closed at 1.2770.

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Powell comments stabilize the dollar

Following a torrid time for several asset markets over the Holiday period in which the dollar was caught in the eye of the storm, it appears to have been calmed down somewhat by the comments made late last week by Fed Chair Jerome Powell.

Powell’s rocky end to the year in which he drew the ire of President Trump, who made it clear where he lay the blame for the precipitous fall in equity markets, has seen the “froth from the cappuccino” removed to reveal the true level for the market. In markets driven by an outside influence, in this case historically low-interest rates where savers receive little or no return on their funds and leverage is cheap, markets tend to suffer from (as former Fed Chairman Alan Greenspan labeled it) irrational exuberance leading to distortions which affect several markets.

As things calm, down, we are left with a dollar that is likely to drift lower as it reacts to the rebalancing of the economy where the Fed, as Powell said last week, will be data-driven. One further issue that Central Banks face is becoming predictable. This leads traders into feeling they have a “one-way” bet which is supported by the actions of the Central Bank.

Powell is clearly learning on the job not having a background in finance and he seems to be learning fast having withstood the barrage from the President which is more akin to his previous role as a lawyer than as a nascent Central Banker.

The dollar index weakened a little yesterday reaching a low of 95.64, closing at 95.69 and looks set to remain in a 95.50/96.80 range for the time being.

Eurozone economy continues to struggle

The pan-Eurozone economic indicators which will be released this week relating to industrial and consumer confidence are expected to fall further as concerns grow over a serious slowdown in economic activity. The incredibly weak data for producer prices which were released late last week has set the tone for falls in the business climate (expected at 0.99 after 1.09 in November), economic sentiment (108.4 from 109.5), and consumer confidence (6.0 from 6.2) this week.

The single currency has been in a reactive mode over the past few weeks as the dollar index has gyrated in response to global equity prices but as the dollar falls into a pattern, so will the euro.

Preparations will be starting soon across the entire region for May’s elections which will set the tone for the next stage of the evolution of the EU.

A strong showing from nationalist or Eurosceptic candidates is expected across the four major economies but it is in the next group; Ireland (likely to be being affected by Brexit), Portugal and the Benelux countries, that the real grassroots support (or otherwise) for further Federalization, with moves towards greater harmonization of fiscal affairs, an EU army, and pan-Eurozone social benefits, will be seen. The EU and Eurozone while always being inextricably linked, are becoming ever more indistinguishable which is starting to create a nationalist backlash such as has been seen in France.

With the French Government likely to approve a budget which will see a deficit in excess of Brussels 3% rule, which may or may not placate “yellow vests,” and Germany slipping into recession, the economic outlook for the region is getting serious which could spill over into further falls for the single currency without any support at all from monetary policy.

The euro rallied yesterday reaching a high of 1.1484 and closed just below that level. There is significant interest to sell from long-term investors between 1.1480 and 1.1540 so the short-term top may be in sight.