ECB Meeting to confirm economic fears

The Governing Council of the European Central Bank will meet on March 7th as the Eurozone economy falls inevitably towards a recession. In its twenty-year history, the single currency has barely had a period of harmony and calm where the economy can gain a strong footing, lurching from crisis to crisis where the very foundation of the concept is constantly under question.

From day one (and probably before), the idea that “one size fits all” has been doubted. The rush to allow several countries in has been based upon their desire to join the “club” rather than their ability to contribute and abide by the rules.

Concerns have grown that founding countries like Italy and Spain may be the first to leave based upon their inability to maintain their debt to GDP ratio and budget deficit at levels acceptable to Brussels. However, it is now emerging that it may be Germany, seeing little benefit in being a member, that “jumps first”.

While this may appear alarmist, it illustrates the constant questioning of the ethos of the combining of such a disparate group of economies.

The fact that after over eight years as ECB President Mario Draghi will leave office in November having never seen sufficiently robust growth or inflation at a level that encourages a rise in interest rates is a perfect illustration of the constant concerns surrounding such an experiment.

Yet again, Sr. Draghi sees himself presiding over a looming crisis which, despite optimistic words, he and his colleagues lack the tools to defeat.

It is hard to make a case for a stronger euro based upon its own merits and it would depend on a collapse of the dollar which in the current environment appears unlikely.

Yesterday, the single currency traded between 1.1294 and 1.1335 versus the dollar, closing at 1.1314.

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Sterling unaffected by political defections

It has been written and commented upon by analysts constantly during the Brexit process that it was an issue that would tear the ruling Conservative Party apart. It, therefore, came as something of a surprise when seven members of the opposition Labour Party left to form their own group in Parliament yesterday. Outraged by three major issues: Brexit, Foreign Policy and Anti-Semitism within the Party, the seven plan to sit as anti-Brexit independents until the next General Election.

As a prelude to a post Brexit “shake-up” in British politics, this is a major event but in the context of the current morass, it changes nothing.

There is still a huge fracture between the “wishful thinking” of Government Ministers who say that talks in Brussels are “progressing” and the official line from EU Officials who say that they still await firm plans from the UK as to what they actually want. With so many false dawns, it is hard to imagine next week’s definitive vote in Parliament solving anything.

The issue has now seemingly been distilled down to a few potential outcomes:

• A delay to the triggering of Article 50
• A second, or people’s, referendum
• May’s plan
• No deal

It appears the country is lurching towards no deal as the default since the other three outcomes face either practical difficulties or lack the support of MPs and/or the Government. Financial markets are still not pricing in the turmoil that no deal will bring even if concern over that outcome is being stirred by what Brexiteers label “Project Fear”.

Sterling remains within a broad 1.2800/1.3000 corridor, reacting day to day to various economic releases.

The release of employment data, which was originally slated for yesterday, will now take place today at 9:30am UK time. The unemployment rate is expected to remain at or close to 4%. The gap between wages and prices will have widened considerably following the fall in inflation in January. Wages are expected to have risen by 3.4% last month compared to 3.3% in December

Yesterday, the pound reached a high of 1.2939 and closed at 1.2928 in quiet trading due to the holiday in the U.S.

Dollar at a crossroads