Market concerns over trade override budget excitement

The pound fell to a new three month low yesterday as the recent optimism over a more expansionary budget was trumped by fears of the EU and UK not reaching an agreement over future relations, including a trade agreement post-Brexit.

Uk Prime Minister Boris Johnson believes there is plenty of time for all the Brexit details to be tied up before the end of the year when Johnson’s timetable for Brexit will expire.

The budget which will be delivered on March 11th, is expected to be considerably more expansionary than anything that has been seen since the Conservative Party came to power whether in a coalition or individually.

The resignation of former Chancellor Sajid Javid means that the progression of Boris Johnson’s complete domination of his Cabinet is complete.

The newspapers are evenly split between those feeling that Johnson has surrounded himself with a puppet set of ministers, while others believe that Johnson is something of a political messiah who is most able to make policy and individual decisions without any input from Ministers or their advisors.

A perfect example is the difference between Javid and Home Secretary Priti Patel. Javid resigned because the Prime Minister ordered him to sack a number of senior advisors while Patel sacked a senior advisor and kept her job.

Retail sales data released yesterday was appreciably better than expected but the combination of several negatives, including the rampant dollar pushed the pound lower.

It fell to a three month low of 1.2849, closing at 1.2982.

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Long term prospects deriving short-term activity

There are several contrasting views about the long-term prospects for the U.S. economy. Every time a new theory is reported, it affects the short-term market and drives the dollar.

Overall, there is a degree of positivity about the longer-term prospects for the economy although, what President Trump will do to add stimulation to the economy during the election campaign is concerning. Trump’s State of the Union Speech was a preview of his view of how well he believes the economy has performed during his stewardship, but he will want to keep that momentum in the run-up to November.

Trump took a gamble, not dissimilar to what Johnson has done about his Chancellor in appointing Jerome Powell as Fed Chairman.

Powell is no Greenspan or Bernanke but he hasn’t really been tested in severe conditions so it is not possible if he would have reacted in a way to confirm his immortality.

Powell has handled every pitch he has received whether economically or politically. It will be interesting to see if Powell is retained should Trump win the election.

Trump will be disappointed by the trajectory of the dollar index recently, as it powers on towards 100. He is likely to begin to throw around accusations of currency manipulation as he fails to register that the single currency has been hit by a perfect storm and it is outrageous to consider Germany in the manipulator category.

Contributing to the dollar’s rise yesterday was the release of the Philly Fed index of manufacturing activity. It rose from 17 in January to 36.7 this month.

The effect on the dollar was close to stellar. It reached a high of 99.91, closing at 99.85. It is a difficult call to make to say there will be a correction before the 100 level is firmly breached and that will need consecutive closes above that level.Today could be momentus with activity data in both the U.S. and Eurozone, with contrasting data likely to provide the necessary boost to the dollar to see it break 100.for the first time since May 2017

Euro weakness becoming an epidemic

Today’s release of activity data for the manufacturing and services sectors as well as composite data could easily be a watershed.

Most market participants are expecting activity in the manufacturing sector to have fallen from 47.9 to 47.5 but the concern of many market participants is for a more damaging fall. Services, as in the UK, are a redeeming feature of activity with February’s data expected to remain around the 51 level which at least signals expansion no, matter how flimsy.

There is a genuine concern for the Eurozone economy but different levels of the administration, as well as different member states, see the issue more seriously than others.

Consumer price data will also be released later this morning. Draghi’s bete noire will continue to fail to live up to expectations. Month on month, inflation is expected by traders to have fallen by 1%, leading to an unchanged year on year figure of 1.4%.

It is unlikely, given the level of activity and previous producer price data, that the ECB’s target of 2% will be challenged any time soon.

There has been talk that during the strategic review that the ECB is currently undertaking, that doing away with an inflation target since it has become redundant will be discussed.

This smacks of short-termism, since other G7 nations are considering the level continuously. In the U.S., inflation is above the Fed’s target, while in the UK, this week’s consumer price data saw a significant move towards 2%.

Yesterday, the single currency continued its recent plunge, reaching a low of 1.0777 and closing at 1.0792.