Brexit fears pushed to the back of traders’ minds

The short-termism that has driven financial markets since the turn of the year continues to affect Sterling as traders pushed doubts about the negotiation of a trade deal between the UK and EU to the back of their minds and decided that the pound is cheap below the 1.29 level versus the dollar.

There is a great deal of uncertainty about the pound long term as the anxiety of the entire departure process has been replaced by the UK’s present twilight zone existence as it has one foot in and one foot out of the EU with issues like the Irish border to be finally put to bed.

Data has been generally supportive. There is no doubt that once the shackles of a Bank of England meeting that went from rate cut expectations to a supportive no change decision, the market has been led to believe that the Central Bank believed that further stimulus was unnecessary.

The level of volatility across all currency pairs has increased over the past two months as several factors have emerged not least of all the Coronavirus epidemic, as the effect on the global economy remains to be seen.

Overnight, house price data has been released and was another positive influence. The housing sector is an important indicator for the economy since it closely follows the business cycle.

Yesterday, the pound continued to consolidate following the low of 1.2872 seen on Monday. It traded to a high of 1.2992, closing at 1.2958.

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Dollar at two-year high versus euro

The U.S. economy continues to exhibit signs that it is far ahead of other G7 nations in terms of growth despite a few headwinds which may slow its progress.

Now that any lingering concern about impeachment proceedings against the President has disappeared, a degree of continuity in the election race, the political scene should remain supportive.

Love him or loathe him President Trump represents a degree of stability, since four more years will continue to see a business-friendly President in the White House despite his many faults. The Democrat Party appears to be in something close to disarray with the favourite for Presidential Candidate, Joe Biden only managing to finish fifth in the latest Primary in New Hampshire.

While the effect of the Coronavirus epidemic on the U.S. economy is unknown it may just be an issue where China and the U.S. are forced to cooperate.

Today sees the release of inflation data and the headline number is expected to have fallen slightly from 2.3% in December to 2.2% in January. This may see further baying from the President for a cut in rates following his torrent of disagreement with Fed Chair Jerome Powell’s testimony to Congress earlier in the week.

It is unusual for the President to be so openly critical of the performance of a Fed Chairman particularly in an election year but then this has been an unusual Presidency all around. Mr Powell may be fearful for his job should Trump, as expected, triumph in November.

Yesterday, the dollar resumed its uptrend after a mild correction. It reached a high of 99.05, closing at 99.00. This was its highest close since early October.

Horrendous production data sounds a death knell

With the dollar making more than three-month highs yesterday, there is no surprise to learn that the euro suffered one of its worst days of the year. Since a significant rally on 31st January the trajectory for the single currency has been unremittingly lower.

The blame for the fall cannot be placed solely at the dollar’s door, in fact, it may be that the weakness of Eurozone data has been a contributory factor to the greenback’s rise.

It all went horribly wrong yesterday for those who had been expecting to see the green shoots of improving investor confidence spill over into activity.

Yesterday’s data for Eurozone-wide industrial production was truly horrendous and led to the currency’s major fall.

Seasonally adjusted industrial production fell by 2.1%. This was even worse than a gloomy market prediction of a fall of 1.6% and followed a stagnant December.

Given the continuing poor data for activity, the confidence of investors will be hit badly, and it would take a brave man to predict either a positive outcome for Q1 GDP or any improvement at all in H1.

The entire experiment is under serious threat and while the Eurozone exudes its seeming confidence in the social side of a united Europe, there appears to be a significant and growing feeling of Fiddling while Rome Burns.

In Italy, right wing politician and former Interior Minister Matteo Salvini faces trial over his treatment of immigration by not allowing a ship carrying migrants to dock for three days, causing unnecessary suffering. This story is newsworthy inasmuch as it may mark a shift to the left in Italian politics since the present coalition has not managed to improve things for the Italian man in the street.

As has already been alluded to, the euro suffered quite badly yesterday. It fell to a low of 1.0865, closing at 1.0875.