Brexit remains the sole driver

A General Election is a major event in every sense but as far as the financial markets are concerned, they see it is a way to get Brexit done. The election that will be held on 12th December has polarised the three major Party’s position, with the Conservatives, who have been in power since 2010, the only one of the three who are prepared to fulfil the commitment to leave the EU in accordance with the result of the referendum that was held in 2016.

Labour have changed from their commitment, according to their 2017 manifesto, to faithfully carry out the “people’s wishes” and now plan to renegotiate the Withdrawal Agreement and put the resulting deal to a fresh referendum with the paper also including a “remain” option. In a chilling reminder of Labour’s affiliation to the trade union movement, the Party has been “advised” to look particularly at workers’ rights and free movement.

Free movement of labour is one of the “four pillars” and they are indivisible, meaning that you cannot have one without accepting the other three., That points to a severely “watered down” Brexit that will do Labour no favours at the polls.

The third of the major Parties, the Liberal Democrats are campaigning on a remain ticket and are the only ones committed to stopping Brexit. This is a gamble but given their performance in recent elections, they have very little to lose.

All three are committed to significant increases in public spending with Labour and the Conservatives vying to outdo each other over the National Health Service and the result of the election, if Brexit fatigue really has set in, could be decided by which Party is more believable in this area.

Sterling is unlikely to move very far out of its current range while the campaign continues. Last week, it traded between 1.2918 and 1.2785, closing close to the high at 1.2904. Since there is very little data of any significance due for release this week, it would take a major electoral event to push the currency out of the 1.2780/1.2940 range.

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Monetary policy barely exercising traders

I mentioned recently that the markets appear to only be able to disseminate the effect of events on currencies one at a time. In the UK it’s Brexit, in the Eurozone, it’s the economy and for the dollar the ongoing trade talks between Washington and Beijing continue to hold the market’s attention.

Last week, Fed Chairman Jerome Powell testified to the joint economic committee of the Senate about the current state of the U.S. economy.

His comments barely registered on the market’s radar as comments made about the state of the ongoing talks held trader’s attention.

It is strange, but irrelevant just what is currently driving the market, it is, however, vital that analysts and commentators can “plug in” to the reasoning traders are using to make their decisions. That is the only way they can provide a salient forecast of how the currency will react.

In the case of the trade talks, they are something of a red herring despite being the focus of the market’s attention currently. Neither side wants the talks to end as it will draw conclusions that one side or the other has “won” or, at the very least, managed to obtain a degree of its wishes being fulfilled.

President Trump needs a strong performance to bolster his 2020 re-election campaign, while China wants to be a member of the top echelon of global decision makers and being able to “trade punches” with the U.S. gives them a certain gravitas.

Powell’s testimony last week gave some support to Trump’s campaign, but he didn’t wholly endorse lower interest rates as a means of stimulating the economy. He voiced his concerns over the effect of lower interest rates on the economy longer term given how inflation is behaving.

In fact, even the Fed. Chair came under the spell of the ongoing trade talks calling them a “headwind” to be considered in the context of ongoing growth.

Last week, the dollar index remained on its well-trodden path. It traded between 97.76 and 98.30. It closed at 97.98 and looks unlikely to move too far out of that range without a significant announcement from (you guessed it) the trade talks.

Euro? ………zzzzzz

What can be said about the euro that hasn’t become hackneyed and predictable? In truth, very little.

It is well known that a major restructuring of the way in which individual nations tax their populations and spend revenues needs to be undertaken. It is also clear that the trade talks (there they are again) between China and the U.S. are vital not just to those countries but to global trade in general.

Since the Eurozone is set up as a major trading bloc, any ongoing threat to global trade will create an issue for investors. As a realist, not blinded by the words of President Trump or his “sidekick” Larry Kudlow, the truth is that since it is in the interest of the entire global community to ensure that trade continues relatively smoothly and tariffs are kept to a minimum. In the case of the Eurozone, provided the U.S. ceases to threaten tariffs on its imports of vehicles from the EU, the economy will start to improve some time in Q2 although it remains susceptible to any unforeseen shock.

As far as the reforms are concerned, the new incumbents in senior jobs in the region; Charles Michel, Ursula von der Leyen and Christine Lagarde face an interesting time. It must be assumed that some effort was spent ensuring that they are able to work together. This week Lagarde chairs her first ECB General Counsel meeting and it will be her press conference followed by a major speech on policy which takes place on Friday that will provide most insight into her plans. The ECB is unlikely to do anything to undo Mario Draghi’s efforts immediately, but the speech should outline a tentative timetable for the future.

Last week, the single currency remained pressured by the market’s recession concerns, but it managed to remain above support at 1.0980. It traded between 1.0989 and 1.1058. As the year comes to an end, ranges will narrow as traders start to look at the currency’s prospects for 2020.