May’s “day trip” meets with hardening attitude

As a prelude to making her case for an extension to the UK’s departure from the EU until June 30th, Prime Minister Theresa May met with Angela Merkel and Emmanuel Macron yesterday. The purpose of her visit to Berlin and Paris was to explain what she expects to use the extra time for despite considerable scepticism that anything will change.

Macron has been “talking tough” about his desire to get Brexit completed in order that the EU can move on, by which he means greater integration. Merkel has been a little more conciliatory towards the UK since she is aware of the effect of Brexit on a German economy badly in need of some positive support.

Today Mrs May will be making her case to the entire EU council which is made up of the 27 remaining Heads of Government. It appears that they will offer a longer extension of up to a year to ensure that a deal can be reached. With the EU standing firm over its assertion that the negotiations ended in December of last year and the deal on offer is the only one available, it is up to the UK to make the next move.

It is coming down to some stark but hardly new choices. No deal, a second referendum, or acceptance of what is on offer from Brussels are the choices although a General Election could take place during an extended delay. If that were the case and the Labour Party was to take power, a softer Brexit including a permanent customs union would be their official line.

The pound mostly ignored yesterday’s instalment of the Brexit drama, trading in a 1.3122/1.3030 range versus the dollar, closing at 1.3053. Traders have no feel for the future of Brexit or the effect of a long delay on the economy. Until there a significant development, Sterling will continue to drift.

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ECB to turn more dovish

Traders will await the outcome of today’s meeting of the ECB for two reasons. First, they will want to know what the Central bank intends to do to stimulate an economy which appears to be sliding almost inevitably towards a recession. Second, they will be interested to hear just how dovish Mario Draghi will be on the future prospects for both the Eurozone and ECB Monetary Policy.

There is no doubt that Draghi will express concern about the economy but if he either kicks the can down the road by saying that more data is necessary to fully understand the issue or gives a bland assessment that wage growth and inflation are on the verge of moving higher, the single currency is likely to suffer a fall close to its year’s low of 1.1176 which was reached a month ago.

There is considerable doubt that the ECB has either the tools or desire to do anything other than add further accommodation to the market. It is also possible that they see a weakening currency as a tool to provide stimulus by making Eurozone exports more competitive.

The Eurozone economy has been hit by a two-pronged attack. At the same time as domestic consumption has fallen, the global economy has weakened which has seen a fall in demand from the region’s traditional markets. As the trade dispute between the U.S. and China rumbles on, the effect on global confidence is negative.

The euro closed virtually unchanged versus the dollar at 1.1261 having made a high of 1.1285 earlier in the day.

Meeting Minutes to provide an insight into FOMC thinking

Today sees the release of the minutes of the latest meeting to the Federal Open Market Committee. While rates were left unchanged, it is expected that the minutes will shed some light on just how members see the strength (or otherwise) of the economy going forward.

Following last week’s mixed bag of an employment report, the market is coming around to the idea that the Fed has paused in its programme of rate hikes rather than brought it to a stop.

That seems to be a naive assessment since the economy is in a state of flux as activity slows in reaction to the hikes which took place in 2018 and there is remaining uncertainty over several ongoing issues. The effect on confidence over the issues facing Boeing and the outcome of the ongoing trade talks with China are unknowns while domestic demand is not particularly strong and inflation well controlled.

The minutes will provide an insight into the thinking of individual members although the outcome is certain to be unclear which will lead the market to think “pause” not “halt”. The jury is still out on the direction of the next move in rates. The timing of that next move is also open to doubt although it is now less likely to be in 2019.

The dollar index, in keeping with the rest of the market, has been afflicted by a wait and see attitude. Brexit, the ECB, and the Fed minutes are all likely to be significant drivers but until there is a little clarity, traders will stick with what they have. It reached a low of 96.86 yesterday but rebounded to close virtually unchanged at 97.03.