Sterling barely reacts to Brexit delay

The pound was marginally stronger versus the dollar yesterday as the UK and EU agreed on a “flextension” to the date on which the UK will leave. The final date for the UK’s departure is now set at 31st October although Theresa May remains committed to the UK leaving with a deal as soon as possible.

Donald Tusk, the EU Council President, asked the UK to “not waste this time”. With London as far from finding a compromise which can satisfy a majority of MPs as ever, the pressure will now be ramped up to avoid the UK leaving with no deal.

The UK will now take part in the European Parliamentary elections which commence on May 23rd. While they will be something of an expensive waste of time, they will at least provide the public with an opportunity to vent its feelings over the entire process.

The pound rallied versus the dollar as the “no deal can” was kicked a little further down the road. It reached a high of 1.3122, closing at 1.3089 and has remained supported overnight.

With Brexit now set to continue right through the summer despite Mrs May’s assertion that she intends for the UK to leave the EU by June 30th, the general feelings of anger and frustration felt by the electorate will be ratcheted up a few more notches.

It is now likely that the Withdrawal Agreement will be put before MPs for a fourth time in the coming days since both Tusk and his EU Commission counterpart Jean-Claude Juncker commented that the extension could be terminated at any time if the agreement was passed. It seems that Brussels was agreeable to an extension but in no mood to compromise any further.

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Draghi says it best when he says nothing at all

Yesterday’s meeting of the ECB was never going to provide an answer to the dual issues of the coming recession in the Eurozone and the ECB’s plans to deal with it.

ECB President Mario Draghi reiterated that the offer of soft loans to banks is the Central Bank’s first line of defence against the slowdown although he was not willing to comment on any further measures.

Draghi bemoaned the “persistence of uncertainties” and reiterated that the balance of risks surrounding the euro area growth outlook remains tilted to the downside. It seems that the ECB still believes that the issues facing the region come from outside its borders and is unwilling to acknowledge the structural deficiencies that mean the Eurozone is almost designed to fail.

The entire issue of a common monetary policy but fiscal policy governed by the nineteen member states individually means that the Central Bank is working with one hand tied behind its back.

The coming elections will provide a significant indication of how greater integration is viewed with candidates standing from both sides of the argument.

Draghi went on to say that weak economic data was lasting “somewhat longer than had been expected”. The ECB remains committed to keeping a high degree of accommodation in place until there is a clear turnaround in activity. Further employment gains and rising wages continue to underpin the resilience of the domestic economy and gradually rising inflation pressures according to Draghi although there is little evidence to support such a claim in the recent past.

The single currency gained yesterday versus a weaker dollar (see below), reaching a high of 1.1296 and closing at 1.1275. There is strong interest to sell from investors close to 1.1320 so it is doubtful that it will extend its gains much further.

Fed dovish now, less dovish for the future

Without saying it in so many words, the FOMC virtually confirmed at its meeting held last month, the minutes of which were released yesterday, that the pause in rate hikes is just that and not a halt to its “normalization” of short-term rates.

Fed members debated the technical aspects of managing the Central Bank’s huge holdings of Government Bonds purchased to add liquidity to the market during the financial crisis. This is seen as a more effective measure of adjusting liquidity than marginally higher or lower interest rates.

There is no clear agreement on the next move for interest rates with some members still concerned over the future of the economy although overall, they believe that while it is slowing there is virtually no threat of a recession.

The U.S. economy is weathering a global slowdown well, but this is most likely still a reaction to last year’s fiscal stimulus which gave a timely boost to an economy which would have been showing signs of stress far earlier without it.

So, although it is still not 100% guaranteed that the next move in rates will be higher, the market can be reasonably satisfied that the Fed won’t need to cut to add stimulus unless there is a significant yet wholly unexpected event.

The dollar index reacted to the continued pause by falling to a low of 96.85, closing at 96.93. Overnight it has continued to face a little pressure as risk appetite returns to the Asian market.