Traders sceptical about poll lead

Any boost to Sterling from news that UKIP would not contest seats won by the Conservatives in 2017 has begun to fade and the markets are looking for the next potential driver.

Overnight, a prominent polling firm announced its latest poll gave the Conservatives a 14-point lead over the Labour Party. While it is impossible to translate that into a potential number of seats gained, such a positive result would provide an overall Tory majority.

Curiously, the financial market has so far failed to react to the news with the pound remaining becalmed as the effect of UKIP’s decision to stand down fades. Its leader Nigel Farage called upon Boris Johnson not to field Candidates in Constituencies where it had never won an election but Johnson, keen to show that there is no “pact” has simply ignored the request.

With a month to go until the country goes to the polls, spending seems to be rivalling Brexit as the Party’s main battle ground with both the major groups vying to outdo each other, especially about the National Health Service.

The first televised debate is approaching and that will provide a major potential for either Johnson to consolidate or Corbyn to start a comeback.

As already mentioned, the pound had a quiet day yesterday. It traded between 1.2874 and 1.2815 versus the dollar closing at 1.2852, just two points below its opening level.

Its recovery versus the single currency continues with the pound making a high of 1.1685, its highest level in more than six months

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Powell unlikely to be too forthcoming

Financial markets appear to be developing a trait whereby they are only able to process one driver or piece of news at a time. In the UK it has been Brexit for the longest time, while in the U.S., for the dollar, it has been the ongoing trade talks with China.

This is little more than lazy journalism since there are multiple factors affecting the markets at any one time and traders are not given credit to be able to disseminate what is or isn’t important.

Today sees the release of inflation data in the U.S., prior to testimony by Fed Chairman Jerome Powell who gives is six monthly report to Government. While he is supposed to provide details about his expectations for the economy, he is unlikely to be pressed on the reasoning behind the rate cuts that have taken place so far this year since it will open a degree of expectation for future actions.

The consumer price data, while not the Fed’s favoured measure of inflation, will give the markets a measure of what is happening to prices following the recent cuts in short-term interest rates.

Inflation is expected to have risen by 0.2% in October versus a 0.1% rise in September. This will bring ex-food and energy inflation to a high of 2.4% year on year. This is well above the Fed’s 2% target and while not of concern yet, may be alluded to by Powell in his testimony.

The dollar index remains within its recent range, trading yesterday between 98.42 and 98.21. Support is around the 98.20 level but there is strong resistance up at 98.80.

Hatches firmly battened down, for now

It seems that the reforms so desperately needed by the Eurozone economy won’t be enacted in a hurry or with undue haste. Even when the proposals are drafted the European Parliament will exercise its right to scrutinize every detail. That is both the beauty and the biggest issue of the EU. Its “one-paced” and unwieldy makeup makes it unable to react to a crisis and, make no mistake, there is a crisis brewing in the economy that it is fortunate hasn’t broken yet.

As the global economy slows, it is simply the entirely natural ebb and flow of trade that is driving the markets and the EU has been given a window of opportunity to “put its house in order” that it is, so far, reluctant to take.

The first step must be the acceptance by politicians that a problem exists. That “elephant in the Parliament” is the need for reform to fiscal uniformity and closer union between state budgets. It is understandable that nation states and the people will be concerned about handing to Brussels the final say on how they raise taxation and equally importantly, how they spend and on what.

There is little agreement on social welfare in, say, Germany versus Italy, or Belgium versus Greece and the last thing that the region needs is another damaging split like the controversy over the financial crisis.

The single currency remains driven, in the main by economic data. There is a slew of releases this week, and today it is industrial production and German inflation. While at some point the release of data for individual nations will have to cease, for now, it often gives greater insight than data for the entire region.

Inflation in Germany is likely to remain weak as the economy continues to slow. A similar story is true for industrial production across the entire region.

It is expected to improve slightly from a year on year fall of 2.8% in September to a fall of 2.3% last month.

The euro is still in the doldrums reacting to moves in the dollar index. Yesterday, it again tested its recent low, falling to 1.1002 and closing at 1.1010