May faces down critics as date for no deal preparations is set

Theresa May faced her most avid critics last evening at a meeting in which she set out her views on the Brexit process and managed to calm calls for a leadership challenge. It seems that for now, her Party is prepared to allow her to pursue a deal with Brussels provided no further concessions are made.

The National Audit Office, which scrutinizes the actions of Government Departments, commented yesterday that Mrs. May’s actions over Brexit have destroyed the notion that no deal could be better than what could be considered a bad deal.

The Government also announced yesterday a date in Mid-November has been set for several measures to be put in place as the first preparations for a no deal departure from the EU.

While a deal is apparently 95% done the final hurdles, the Irish border and a backstop agreement, are proving to be impossible to clear and since it will require a significant compromise from one side or the other, preparations for a hard Brexit are entirely justified.

The pound tumbled to a six-week low versus the dollar yesterday before Mrs. May had even addressed her colleagues.

The fall was caused by the market finally accepting that a no deal scenario has now become the most likely outcome with no new talks scheduled and both sides accepting the challenges to be virtually insurmountable.

Sterling reached a low of 1.2867, closing at 1.2884. It has remained close to its closing level overnight.

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Euro falls as Rome insists there will be no change to budget

The single currency also had a tough day yesterday falling close to its year’s low as the row between Rome and Brussels threatens to spiral out of control and data showed that the economy may be faltering.

Italian Deputy Prime Minister Matteo Salvini set the tone by commenting “it is a waste of time exchanging ‘silly’ letters, Italy will not yield to pressure”. One of the lessons of the financial crisis is how quickly the issues faced by one member of the Eurozone can create contagion and Brussels fear is that history will repeat, and the rising bond yields being seen by Italy will spread to Spain, Greece, and Portugal.

There is now a real possibility that today’s ECB meeting will announce a delay or postponement of the reduction in the Asset Purchase Scheme. Mario Draghi, the ECB President, was quoted when the withdrawal was announced, that he would not hesitate to reinstate or increase bond purchases if such action was deemed necessary.

The euro fell to 1.1378 versus the dollar yesterday, less than 75 pips from its low for the year. The market will await today’s ECB news conference to set the short-term direction for the currency.

Any further significant fall will call into question the ECB’s insistence that monetary policy will remain unchanged until later next year given the inflationary aspects of a weak and weakening currency.

Purchasing Managers Indexes of activity across the entire region for both manufacturing and services fell by significantly more in September than market expectations which also pressured the single currency.

Dollar rallies by default

With both the pound and euro approaching their year’s lows, the dollar rallied almost by default as the divergence of the respective economies and monetary policies pushed the dollar index close to its years high. It reached 96.53 although it has receded a little overnight as profit-taking set in.

President Trump’s administration remains unsure of its desire for a strong dollar while nothing has been resolved since the apparent disagreement between the President and his Treasury Secretary back in February.

Tomorrow sees the release of the first cut of the Q3 GDP data for the U.S. with a significant fall from Q2’s 4.2% expected.

This quarter will give a “truer” picture of the economy since the stimulus provided by Federal spending and significant personal tax breaks will no longer have an effect.

The expectation is for a first cut of 3.3% which will remain the strongest in the G7 despite the fall relative to Q2.

Next week will see the release of the employment report followed by the Midterm elections. It is therefore likely that the dollar is going to see significant swings over the next couple of weeks that could last well into November.