Lack of cross-Party agreement will limit options for MPs

The gossip and rumours escaping from the cross-Party talks being held between the Government and main opposition Party over Brexit appear to signal that negotiations are heading nowhere.

The Government is resisting a demand from Labour that any deal agreed by Parliament should be ratified by a second referendum. Furthermore, despite the EU being adamant that negotiations are over, there are further demands that a continuation of Britain’s membership of the customs union and single market be re-explored.

The threat brought by this political brinkmanship is that the current withdrawal agreement will be finally considered dead if MPs again reject it when it is debated in a couple of weeks’ time, as the opposition will continue to disagree with its contents. That will leave no deal or the revocation of Article 50 as the only two options available to Parliament. Some would argue that that was the point of the original referendum but it would bring political and economic chaos to the country. It is hard to see Parliament voting in favour of the UK’s departure with no deal and it is therefore probable although far from certain that such an outcome may prompt a second referendum.

Since October 31st is “set in stone” as the UK’s departure date from the EU there is a genuine feeling that the “phoney war” is coming to its final battle and the country may yet get to decide.

The pound has reacted badly to the latest developments and yesterday it fell to a three-month low versus the dollar of 1.2826 and closed at 1.2846. If the choice is going to be between no deal and no Brexit, the pound is going to see added volatility based on which outcome becomes more probable.

The Prime Minister is meeting with the powerful backbench 1922 Committee later today. She is expected to be pressured to announce a date on which she will leave office. While Mrs May’s departure is unlikely to be a definitive moment in the Brexit process, her exit will destroy any hope of the Withdrawal agreement passing.

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Euro slide halted by tariff hopes

The first piece of positive news, or at least rumour, on trade allowed the single currency to stabilize following the release of weaker than expected economic data this week that had seen the strength of the euro weaken.

It is thought probable that President Trump will defer threatened tariff increases on the U.S. import of motor vehicles manufactured in the EU.

The threat is expected to be deferred by up to six months to allow time for further negotiations.

The outlook for the single currency remains clouded by the prospect for improved economic activity and an expected rise in inflation. Mario Draghi, the ECB President, has been adamant that any turnaround in the economic outlook for the Eurozone will be preceded by an increase in inflation brought about by higher wages. This has led traders to concentrate on price data as the first signal.

The euro had been sold off following a comment by Italian Deputy Prime Minister Matteo Salvini that Italy would likely break EU fiscal rules on budget deficits in order to improve employment in the country. This caused ripples of concern through the financial markets and reopened the argument from late last year when Rome published a budget that would have broken the EU’s rules on budget deficits only for it to be lowered following discussions with Brussels.

This was clearly an election ploy by Salvini, but the Nationalist Government in Rome continues to be the “bete noir” for Brussels and will remain the flagship for those against further integration of the EU.

The single currency traded between 1.1225 and 1.1177 yesterday and closed just one pip below its opening level at 1.1203.

Fed back in focus following weak data

The Fed seems to be taking a leaf out of the ECB’s book and gaining credibility as a result. The ECB has become renowned for its policy of “leaving well alone” and the most recent comments from Fed Chairman Powell seem to comply with that doctrine.

The market is still a little off balance over the next move in short-term interest rates but seems to agree that whatever that move is, it will be some considerable time in the future and possibly not even in 2019. That will mean that any move in rates next year will be made against the backdrop of a Presidential election although the tradition of not moving interest rates close to the vote was broken in 2016.

Yesterday’s release of industrial production and capacity utilization data showed that the economy continues to falter. Industrial production fell by 0.5% in April following a 0.2% increase in March and a market expectation of no change. Capacity utilization was also lower at 77.9% following a March’s downwardly revised 78.5%

Next Wednesday sees the release of the minutes from the latest FOMC meeting which should provide some clue to the thinking of the members of the Fed although a definitive guide as to when rates will change will not have been part of the discussion.

Yesterday, the dollar index rose to a high of 97.70 following increased risk appetite on hopes that the tariffs on U.S. car imports will be deferred. It closed at 97.59 in what appeared to be a bout of profit taking on long positions.