Sterling at six week high as Brexit hopes grow

Boris Johnson stubbornly refuses to accept anything other than the UK’s departure from the EU on October 31st.
Johnson is set to meet EU Commission President Jean-Claude Juncker today for further talks.

His attitude has started to be taken seriously in Brussels and could be “bearing fruit” as rumours have begun to circulate that there may be some change being discussed that allows Northern Ireland to remain within the customs union. This would effectively move the border between the UK and EU into the Irish Sea.

This had been a major sticking point for the deal negotiated by Theresa May, and it is yet to be seen just what has been offered by Johnson to the DUP in exchange. There are several “technical” details that will need to be agreed but traders certainly took seriously the possibility that the UK could leave the EU on Halloween with a deal in place, as Johnson has been promising.

Globally, Central Banks continue to look to lower interest rates as has been seen from the Federal Reserve and ECB recently. The Bank of England, which may have more reason than to cut given the economic uncertainty caused by Brexit, will almost certainly be unmoved when it meets this Thursday.

Should inflation remain close to the Government’s 2% target when the data is released on Wednesday, the MPC will hope that last week’s rally for Sterling will continue as it should provide something of an anchor on prices.
Last week the pound rallied to a high of 1.2507 versus the dollar having remained above 1.23 all week. Against the single currency, it continues to improve, reaching a high of 1.1291.

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Market indifferent to ECB action

Given the price action of the single currency since Thursday of last week, the market is obviously “underwhelmed” by the actions of the ECB.

The general feeling is that the Central Bank took the least possible action to reverse the Eurozone’s slide into recession. This was Mario Draghi’s penultimate meeting of the General Counsel and from his remarks, it seems he sees himself as on borrowed time. Just how Christine Lagarde, the incoming President, can change matters in a practical sense is hard to imagine.

There is no doubt Lagarde will bring an element of charisma and political savvy to the role as Central Banks move towards less pragmatism, as would be expected from economists, and more inclusivity.

It had been expected that the appointment of a lawyer at the Fed would bring a different perspective. It has, but not as President Trump would have hoped. In the Eurozone, Ms Lagarde is likely to forge closer bonds between Frankfurt and Brussels which could lead to a better understanding of the economic needs of the region. Draghi’s ECB has appeared to act independently only having a minimum of interaction with the European Commission.

Traders have become virtually immune to poor economic data from the Eurozone, barely looking to either position themselves ahead of it or acting in retrospect to what they expected to happen becoming reality.

Although data is currently predicting that the slowdown is reaching its nadir, the market wasn’t particularly surprised at the downgrade of both inflation and growth expectations by Sr. Draghi at his press conference on Thursday. One crumb of comfort is that the downgrade was less than it might have been in the circumstances.

Last week the single currency traded in a relatively narrow range as traders awaited the ECB meeting. Following the meeting the euro drifted a little higher, reaching a high for the week of 1.1105 having reached a low of 1.0926 in the immediate aftermath of the announcement of a rate cut and the introduction of QE.

Yet another “pivotal” FOMC meeting

Since Jerome Powell became Chairman of the Federal Reserve, it seems that despite his “lawyers’ demeanour” the market has been enthralled by his methods in a way that hasn’t been seen since the halcyon days of Bernanke and Greenspan.

That is not to say that traders hang on his every word in the manner of those two Central Banking Behemoths, but more the fact that he is unpredictable which puts him at odds with his boss.

This week’s FOMC meeting is likely to add to that reputation as it remains extremely difficult to predict just what the Fed will do. Of course, the decision is not Powell’s alone, but he can and must justify the actions that his colleagues vote for.

On balance, the expectation is for another 25bp rate cut but with inflation creeping higher, that is not 100% certain.

Economic data released recently points to a cut with employment failing to match market expectations.
With conflicting demands coming from the Administration and a trade deal with China at least reaching the “further negotiation stage”, it could be that the FOMC may agree that another month of introspection may be necessary.

Were that to be the case, the dollar index would strengthen considerably, particularly since the euro continues to suffer.

Last week, the dollar index was in a 99.11/97.99 range although it closed marginally weaker at 98.20.