Rudderless HMS Brexit out of control and drifting

Bereft of new ideas, Prime Minister May has used every card she has been dealt and is going to return to her original deal to try to obtain an agreement before having to put the country through a pointless set of elections to the European Parliament.

Following the Easter recess, there will be another set of indicative votes held when MPs will be allowed to put forward suggestions in order to get some consensus on the way forward.

With a long Brexit delay now in place, the warning from Donald Tusk will be ringing in Mrs Mays ears. Despite being told not to “waste the time the country has been given”, Mrs May has shown that her “cupboard is bare” and it falls back to the well-worn choices; no deal, Mays deal, people’s vote or a General Election.

The financial markets have become immune to the constant regurgitation of the same options and appear to have decided that until there is some positive action that will produce an outcome which can be relied upon as final, they will leave the currency alone to drift on its well-trodden path.

Yesterday, the pound traded in a 1.3109/1.3049 range, closing on the low. Next week sees the release of employment, inflation, and retail sales data which will provide the markets with some diversion as it awaits some outcome to the Brexit conundrum.

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Powerless ECB struggling to stimulate growth

More than twenty years after its birth the ECB is failing to mature in the manner that had been expected of it.

The global financial crisis allowed the ECB to follow the lead of the Fed and BoE in cutting rates and entering quantitative easing. However, the current downturn has afflicted the Eurozone far more significantly and the Central Bank has been left without the tools to be able to provide accommodation and promote growth.

The tone of the statement by ECB President Mario Draghi on Wednesday was almost one of resignation. He clearly intimated that the Bank would have to “tough it out” and try to provide funding where it was able but fiscal stimulus is beyond its remit.

With the ECB side-lined, hoping for the best but fearing the worst, the financial markets have the single currency firmly in its sights. The one saving grace for the euro is the fact that it makes up a significant portion of the dollar index. While the dollar remains in a “corridor of uncertainty” as its own economy stutters the euro benefits.

Activity and sentiment indexes will be released for both the entire eurozone and several individual nations next week. First indications of the ZEW industrial sentiment index which will be released on Tuesday are that it will fall from -2.5 in March to -9.5 this month for the entire region with a similar outcome for Germany where ZEW is based.

There will be a major focus on the manufacturing PMI’s which will be released on Thursday. The PMI for the entire region was at 47.5 in March and it is feared it could fall as low as 45 in April. Since the market is expecting a poor number, the risk for the currency is to the upside, since any sign of improvement will feed through into euro buying.

Inflation data will also be released and despite Draghi’s assertion that there will be a pickup due to higher wages, price rises will remain benign, with CPI rising by just 1.4% YoY in March.

The euro fell to a low of 1.1249 yesterday and closed virtually on its lows. Overnight it has rallied a little as improving risk appetite drives the dollar lower. It has so far (06.00 BST) reached a high of 1.1295.

Dollar in a range as market seeks more guidance

There has always been an odd relationship between the financial market and the Federal Reserve. No one wants to show their hand too early and give too much away about what they are thinking.

They each have a mutual effect on the other and they each fear getting the other party’s actions badly wrong. In the current episode of this drama, the market is unsure of the Fed’s intentions towards interest rates and Jerome Powell, the Fed Chair, is determined to “keep his powder dry” until he feels more certain about the direction the economy is going to take long term.

Equally, the market has a fair idea that the current pause in short-term rate hikes will last until year end at least but it is what happens after that which is exercising their minds.

Meanwhile, the dollar drifts in a narrow range while it awaits either confirmation of the Fed’s intentions or an outcome from the ongoing trade talks or both.

Next week’s most significant data release will be industrial production and capacity utilization. With capacity utilization still at 79.9%, a 0.3% increase in industrial production in March is expected after a flat month in February. This will provide a little cheer to those who are bullish for just a shallow slowdown in the U.S. economy.

Yesterday, the dollar index drifted a little higher although it has corrected overnight. It reached a high of 97.20, closing just one pip lower but has given back those gains in Asian trade falling back to a low of 96.95.