UK facing its greatest upheaval in a generation

After more than two and a half years, which it now seems have been largely wasted, tomorrow sees the vote in the House of Commons on the deal which has been agreed between London and Brussels on the departure of the UK from the EU.

Even the time since the original vote was deferred has not brought even a glimmer of hope for a solution to the crisis which is becoming ever more likely to engulf the country.

Following Friday’s price action which saw the pound rally through what had been considered significant resistance, it is clear that the market is more susceptible to positive rumour than the almost certain defeat for Mrs. May’s plans.

The pound rallied versus the dollar to a high of 1.2865 on Friday, its highest level since late November, as a rumour that Brexit was to be delayed beyond March 29th due to a technical issue where not all the requirements of the UK’s departure were likely to be in place swept through the market.

This was quickly denied but those traders who liquidated short positions illustrated perfectly the nervousness of the market and the enormity of the issues facing the UK should it depart the EU with no deal on the future relationship. It seems that many simply cannot countenance a no deal Brexit.

Today’s newspapers are full of rumour and counter-rumour of secret deals and plots swirling around Westminster and it is probable that unless there is a major announcement, the pound will remain confined to a narrow range as it awaits tomorrows vote.

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Data confirms EU’s slide toward recession

Industrial output data released by Italy on Friday went a long way to confirming what the market has grown to suspect for a few months now; that is that the EU’s major economies of Germany, France Italy and Spain are dragging the rest of the region towards a recession.

The market has grown used to major shocks like the 2008 financial crisis dragging economies into economic contraction and that makes the current situation that much more of a concern.

Monetary policy has been at its most accommodative for many years but in contrast to the U.S., the eurozone is struggling to find any growth or optimism in future development. The ECB is tethered to its inability to affect fiscal policy as each member of the Eurozone has its own tax regime. It would be impossible for an agreement to be reached on a Eurozone-wide cut in taxation to provide the stimulus that was seen in the U.S. a year ago.

Industrial output in Italy fell 2.6% year on year in November after a rise of 1% in October as activity in the entire region slowed leading to a fall in demand.

As the eurozone enters a crucial period as the run-up to elections in May begins there is a growing feeling that it could be “every man for himself” as the nationalist feeling grows and any further move towards greater Federalization is placed on the “back burner”.

The single currency fell versus the dollar to 1.1457 on Friday, closing just five pips from the low. It continues to gyrate around the significant 1.1520 level and appears unable to gain a solid foothold above that level.

Dollar still taking Fed. actions on board

Following a year in which the dollar was “king” and it appeared that the Fed would need to simply adjust its foot on the accelerator to keep the economy growing at a healthy rate, the fact that it may indeed need to use the brake to slow things a bit more has come as something of a shock to the greenback.

Traders are still coming to terms with the Fed’s intentions this year as it has heard FOMC Chairman Jerome Powell is perceived to have turned a little dovish.

In fairness, Powell was never particularly hawkish in his comments last year despite President Trump’s tirade about the sanity of the rate adjustments that took place. In his first few months in charge, it appeared that Powell believed actions spoke louder than words and he was prepared to be guided by his colleagues as he eased himself into the role.

It is now safe to assume that the Chairman’s comments in the past few months have been his way of asserting himself in the role and the Fed could now be considered a little more reactive to data than preemptive as it was through most of last year.

The dollar index seems to have settled into a more comfortable range, trading between 95.00 and 97.00.
The more significant driver of the dollar than the domestic economy at present would seem to be global trade.

Overnight China released trade data with its exports falling by 4.4% and imports by 7.6%. This primarily affected the AUD since Australia is China’s largest trading partner and supplier of a large volume of raw materials. The dollar index also reacted negatively, capping a rise which had reached 95.76 on Friday.