Market balanced between continuity and trade concerns

As the dust settled on the election victory for the ruling Conservative Party, trader’s attention, typically, turned to the ‘next big thing’.

As Sterling rallied, briefly, above the 1.35 level, immediately following the results of the exit poll on Thursday evening, it was evident that the promises of an election campaign were about to be overtaken by the reality of the negotiations over a trade deal between the UK and EU.

Those discussions will certainly be as tough as anything that has gone before in the Brexit process, particularly as EU Heads of State have already started to make public their demands for reaching an agreement quickly.

It was a clear case of buy the rumour sell the fact as Sterling was unable to push on through the 1.35 level on Friday as its explosive reaction to the exit poll proved to be the ‘froth on the cappuccino’. It drifted lower against the dollar, closing at 1.3344. It also traded up to a high of 1.2082 versus the euro although its correction wasn’t as stark, as it closed at 1.2005.

The rest of the year will most likely be positive for the pound as Boris Johnson accelerates the Brexit vote through Parliament but that positivity will be tinged with caution now that there is nowhere to hide for the Government as the negotiations start all over again.

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Deal deflects impeachment worries for President

The dollar index became a ‘makeweight’ in the market’s excitement over the UK election as it fell to 96.72. Through the day, it managed to claw its way back to close right on the support level at 97.20.

The market awaits the details of the trade deal that has (apparently) been agreed between the U.S. and China. Traders are reluctant to take any significant positions so close to the Holiday and year end.

There is a frustration that no details of the deal have so far been released. Beijing has not made any comment on the magnitude of the deal and thoughts are turning to the political implications for President Trump who is desperate for some good news to deflect his own situation.

Impeachment hearings continue and have moved, as far as Trump is concerned, from the abstract, to a real concern over his future. The two articles of impeachment over pressure he put upon the President of Ukraine to investigate a probable rival in next year’s election have grown in intensity. The Chairman of the House Intelligence Committee, the body that is hearing the case, said yesterday on U.S. TV that “If anything this President’s conduct is far worse than anything Nixon did, far more sweeping in its obstruction of accountability, far more damaging to our national security and the cover-up that was Watergate.”

Until a few months ago Trump was considered to have a good chance of being re-elected. Now he stands just 67 votes away from being tossed out of office.

The economy will take a back seat while proceedings continue. Confidence that there will be a reasonable level of growth next year has taken a hit although if the trade deal is as much of a ‘game changer’ as has been intimated that could all change.

The dollar’s dual role as domestic currency and global reserve has meant that any deal is a double-edged sword. Although it is positive domestically, the deal will also be a benefit to the single currency as the Eurozone tries to export its way out of the economic doldrums.

Praises new approach, but avoids details

It has been said many times that new ECB President Christine Lagarde was handed the role due as much as anything due to her political nous.

The Central Bank’s move away from “stodgy bureaucratic machine” to ‘innovative cutting-edge institution’ will be long and arduous but Lagarde has already started to show her credentials.

On Friday, she made a speech to the European Banking Congress. She was ‘long on rhetoric and ideas, but short on detail’, using language a politician would be proud of. Maybe she is just too new in the role to be able to add ‘flesh to the bones’ or possibly, she is doing what she was elected to do.

She praised the EU’s move towards greater unity, environmental policies, digitization and greater military cooperation. She clearly avoided fiscal union and the thornier subjects that will receive greater scrutiny throughout next year.

She commented on how the ‘old ways’ are being challenged but failed to follow-up on how that will happen financially or economically.

The scale of the role will be brought into focus this week as activity data is released later this morning. Manufacturing output is expected to continue stagnating, but should there be any sign of improvement, as the single currency showed on Friday, it is prepared to react to positive news.

The euro rose to a high of 1.1205 in the wake of the UK election result but fell back to close at 1.1116