Dollar reaction to equity carnage muted

The dollar index fell to a low of 96.32 yesterday and closed just eight pips from that level as the FX market continues to be affected only marginally by the drivers that are seeing significant moves in equity markets.

The continuing jibes aimed in the direction of the Federal Reserve by President Trump are being studiously ignored by chairman Jerome Powell who may be starting to feel that the job has become far more difficult than it was during his first six months in office. As it becomes more and more likely that the FOMC will hold back on its first interest rate hike of 2019 until close to the end of the second quarter, the pressure on Powell will inevitably lessen as the President moves on to another topic.

Trump’s rancor over interest rates is as bizarre as it is unwarranted since the rate of growth seen in the second quarter, in particular, was a direct result of his actions on income tax. While the U.S. economy is undoubtedly slowing there is little to no chance of it falling into a recession next year.

The data releases towards the end of next week will be meaningful in the current environment, with manufacturing output expected to fall and headline employment likely to be as volatile as ever although wage inflation seems to be running out of steam.

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UK facing up to no deal as Brussels starts to fret

According to some of the UK’s papers this morning Brussels is starting to wake up to the idea that should the UK leave the EU in March with no deal, the thirty nine billion-pound divorce bill won’t be paid. This could leave a considerable hole in EU finances and will put pressure on Germany which will become the “makeweight” in any future budget negotiations.

In the UK there continues to be an air of acceptance creeping in as Parliament is still more than a week away from reconvening despite opposition leader Jeremy Corbyn calling for an earlier
return.

It would seem that Prime Minister Theresa May has taken the holiday period to gather her thoughts ahead of the debate which starts on January 7th. Parliament is not going to vote in favour of her draft agreement so she will be left with the alternative of preparing for an ugly time both economically and politically.

No amount of advance guidance will be able to prepare businesses for what will happen in the immediate aftermath of a no deal exit and outstanding questions, in particular, the Irish Border will remain unanswered. The intentions of Brussels over the border in the event of no deal remain unclear.

If they close the border, Dublin’s economy will suffer, possibly even more than the UK. The recent scaremongering over the potential fall in the economy and its effect on jobs was fuelled further by a senior UK Police Official yesterday who commented that the UK will be less safe since the police won’t have access to databases of criminals developed for use within the EU.

The pound waits nervously in the wings as the days tick by. Traders are positioned as they want to be so a further precipitous fall is unlikely unless no deal becomes the “official” position. That is unlikely to happen since the UK will hope for/expect to be done right up until one minute to midnight on March 29th.

Yesterday, Sterling made a high of 1.2675 as it awaits fresh impetus that is unlikely to come around for another ten days or so.

Euro in the doldrums as economy fades but not significantly

It is almost fitting that as we enter the last year of Mario Draghi’s ECB Presidency that the market is acting in a manner that befits Draghi’s benign negligence of the Eurozone economy over the past few years.

Draghi has, without seemingly becoming too laid back, managed to ensure that less is more when it comes to tinkering with economic policy. It is unsure what Sr. Draghi will do in retirement. There will certainly be a position available to him at the Bank of Italy as the country steers its way through the minefield so of trying to comply with Brussels regulations while trying to satisfy a partisan nationalist electorate that voted for a nationalist electorate which clearly expects it to deliver on its promises.

Meanwhile, other areas of the Eurozone are bumping along the bottom although the single currency rose yesterday despite continued weak economic data. It reached a high of 1.1454 although it did retreat to close at 1.1421.