Brexit still a concern but traders bullish over data

There are two opposing forces currently driving Sterling. The first is the fear of no deal being agreed by the end of the year over an EU free trade deal. Michael Gove, a member of the Cabinet told a conference yesterday that there will inevitably be border checks on goods from the EU entering the country from Jan. 1 next year.

There are several sticking points with financial services potentially the most damaging to the economy.

The entire service sector accounts for around 80% of the UK’s output.

It is understood that Sajid Javid the Chancellor of the Exchequer. Is keen to agree a deal that will last decades giving the UK access to EU markets. Given the UK’s global place in the financial services it is certain that Brussels will demand similar access.

The more positive force in the economy right now is the better than expected data releases that have been seen since the turn of the year.

Confidence emanating from the fact that the UK has now cleared the first Brexit hurdle, and the end of political uncertainty have provided a degree of confidence that economic armageddon isn’t just around the corner.

Ironically, the Bank of England has returned to the fold of influencers with its decision to leave rates unchanged at its latest meeting. There is no doubt that the Central Bank had been in danger of being marginalized while Brexit talks were continuing and Governor Mark Carney, who leaves the role next month, was a surprise omission from the Government’s planning.

The data for like-for-like retail sales was released last night. It showed that there was zero growth month on month following a 1.7% increase in December.

Later this morning, manufacturing and industrial production numbers will be released as well as the preliminary data for Gross Domestic Product. It is expected that there was no growth in Q4 following a 0.4% rise previously. If the data is worse than expected it will dent the level of investor confidence and the pound may continue its recent correction.

Yesterday, Sterling fell to its lowest level since November 29th at 1.2872 but recovered a little to close at 1.2916. Overnight, following the data the pound has barely changed as traders await this morning’s releases.

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Employment inspired confidence remains

The dollar has been gaining over the past few sessions as a perfect storm of positive influences have combined.

Despite the highly charged political motives behind the decision, The fact that President Trump survived his impeachment charges has given a boost to the market ahead of the preliminary start of the 2020 election race, Second, although the full effect of the Coronavirus outbreak is unknown, the U.S. appears able to whether the storm and the dollar is benefitting from a safe-haven bid.

Finally, last week’s release of a positive employment report is the third leg of positivity that is driving the dollar as the economy starts the year on the front foot.

Several Fed Presidents are speaking this week, culminating in Fed. Chairman testifying before the Congress Committee on Financial Services. While his testimony is published prior to its delivery, it will doubtless influence the greenback.

Powell is unlikely to deviate far from his recent message, any expectation of a change in short term rates is not expected for some time since the balance of risks is fairly equally divided between a cut and a hike.

President Trump will be expecting the Fed to stick to the rules where monetary policy remains in the background during an election campaign.

Inflation data will be released tomorrow. Although the consumer Price Index is not the Fed’s favourite measure due to its narrow basket, the market will be watching for inflation continuing to creep up as an indicator of future Fed action (whenever that may be).

Yesterday, the dollar index continued its recent rally. It reached a high of 98.88, closing at 98.86. Around the 98.80 level was expected to provide a degree of resistance so a shallow correction may be seen before further strength.

Virus concerns hit investor confidence

Investor confidence has been rising well ahead of any similar move in activity in the Eurozone economy.

Yesterday’s release of the Sentix report on investor confidence saw that change as a combination of the Coronavirus outbreak, a degree of disappointment that the economy, despite seemingly bottoming out, is not turning particularly positive and the continued ineffectiveness of the ECB plays on investors’ minds.

Confidence fell from 7.6 in January to 5.2 this month. The index which uses a matrix of 36 different factors and an algorithm to adjust for further outside influences is a very accurate leading indicator for the economy.

The fall in retail sales has been a cause for concern as, despite the level of activity falling, the consumer had been one of the bright spots.

One commentator disregarded the data as being irrelevant as the full effect of black Monday is not understood since it is a new phenomenon in Europe, therefore the seasonal adjustment is incorrect.

While that may be so, it is unlikely that the number is sufficiently skewed to have such a radical effect.

The speed of any recovery that may be seen over the next twelve to eighteen months is entirely dependent upon a degree of fiscal union. There is little doubt that the Eurozone has been hampered in its growth over its entire existence by the fact that each individual nation sets its own fiscal plans which leads to a reduction in the speed of GDP growth.

As the ball is clearly in Brussels’ court, the ECB may become somewhat irrelevant until progress on that topic is seen.

Yesterday, the euro reacted to the stronger dollar and fell to its lowest level since October 2nd. It reached 1.0908, closing at 1.0912. As the economies of the Eurozone and U.S. continue to diverge, it won’t be long before parity comes back into the discussion. Ironically a further fall, which will truly reflect the dichotomy between the two, may serve Europe better than the U.S.