Then there were two!

Since it appears that there is no Parliamentary majority for either the draft Brexit deal negotiated by Prime Minister Theresa May, or a “no deal” Brexit, the UK Government is now facing what appear to be its final two options.

The idea of a free vote in Parliament over the calls for a second referendum is being floated and appears to be a sensible solution. Since a vote along Party lines will descend into another survival mission for the Government and the Opposition will try to further its charges of incompetence, allowing MP’s to “vote their conscience” or the wishes of their constituents may at least allow the process to move forward. The other option which is by far the most unpalatable would be to accept the EU’s assurances over the backstop which leaves the UK open to continued “rule” from Brussels indefinitely.

A second referendum is being labeled unconstitutional, the breakdown of democracy or a sensible solution depending upon which newspaper one reads or which news channel one watches.

The effect of the continued uncertainty is having a predictable effect on both the pound and the economy. Buried in the excitement over the pace of wage inflation, last week’s employment report showed an uptick in unemployment which could be the start of a trend with job losses starting to accelerate. The pound continues to fall, with any relief rally attracting selling as Sterling reached a low of 1.2476 last week.

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Market awaits FOMC pronouncement

In what is like the scene from the film Groundhog Day where a woodchuck pronounces whether there will be “six more weeks of winter”, the market awaits the announcement from this week’s FOMC meeting in New York where Chairman Jerome Powell will pronounce whether the U.S. economy is starting to falter or whether the Fed can continue to raise rates.

Economic data has been mixed recently as was illustrated by the latest employment report and concerns remain over the trade disputes between the U.S. and China.

Advance guidance is that the Fed will hike this week and its economic projections, while not as strong as were seen previously, should be able to construe any slowdown as a bump in the road and not the beginning of the end of the current cycle.

The dollar rose again last week with the index reaching a high of 97.71. That level has been the top in recent weeks and it may take a significantly more hawkish Fed than is expected to push it through and on towards a new high for the year.

Powell’s language at his press conference following the meeting will be closely observed for any nuances which betray the Fed’s plans for next year. The Chairman has become more circumspect as his first year in office has progressed, coming to understand the effect his utterances potentially have.

Draghi praises single currency. Warns against rise of nationalism.

Mario Draghi, the “soon to depart” President of the European Central Bank is a man at odds with his national characteristics. Despite being an Italian, he exudes calm, considered personality traits which contrast markedly with the personality of the members of the coalition Italian Government who continue to want to “tug on the tiger’s tail”.

In a speech on Friday, Sr. Draghi extolled the virtues of the single currency, calling its creation “exceptional, even anti-historical”. While it is indeed a considerable achievement to create a single currency from nineteen individual economies, the eternal question remains, “does one size really fit all”? This will be the question that needs to be answered as the Eurozone moves towards greater integration.

For the single currency to truly work, the question of fiscal as well as monetary integration needs to be solved and while there are EU members that are not members of the single currency the reconciliation of taxes and social spending requires resolution.

In his speech, Draghi warned of the nationalism which has pitched his country’s Government into a position which is firmly at odds with Brussels. The issue of national sacrifice for the greater good of the entire region is the basis of the coalition between the Five Star Movement and the League.

As growth in the Eurozone slows down, Sr. Draghi will face a difficult final year in office. Having dragged the economy up by its bootstraps following the financial crisis he now faces the task of “fixing” the economy without any new financial tools at his disposal.

Last week the euro continued to weaken. It reached a low of 1.1269 but managed to recover to close above 1.1300 which now seems to be a pivotal point.