May continues to believe

Yesterday, an agreement was reached between the Prime Minister and the Leader of the opposition that a televised debate will take place between the two prior to the decisive vote in Parliament on the Brexit agreement.

However, in common with the two-and-a-half-year disaster that the UK’s departure from the EU has become, they failed to agree on which of the two main broadcasters should screen the event. Mrs. May has agreed that it will be on the state-run BBC while Labour leader Jeremy Corbyn wants it on commercially funded Independent Television (ITV).

Corbyn put forward entirely spurious reasons for wanting it on ITV which basically sums up his electability as Prime Minister.

However, it is the entire premise of the debate that is flawed and sums up eloquently the reason that Brexit has been such a tough process.

Brexit is NOT a political issue. There are as many remainers in the opposition ranks as there are Brexiteers on the Government side. The decision about whether the agreement between London and Brussels should form the basis of the UK’s departure should be given the credibility of a “free vote”. Instead, MP’s will be expected to vote along party lines and not in line with their “conscience”.

The pound has remained unmoved by the volume of rallying that has taken place over the past week, and the figures that have been produced for how much various scenarios will cost has simply added to the torpor that is afflicting the public.

The pound is likely to remain in its 1.2850/1.2700 range until the vote takes place unless there is a significant development in the process. The threat to Mrs. May’s leadership appears to have been deferred until the vote has taken place.

Sterling traded down to a low 1.2755 yesterday and closed at 1.2780.

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Greenback losing its supports

The dollar has, in general, had a good 2018. It has received support from several quarters which have enabled the index to reach a high of 97.70. However, as those supports fade, further strength is far from a given.

The effect of the fiscal stimulus from earlier in the year where President Trump cut taxes is now starting to fade, the FOMC is now apparently at odds over the pace of future increases in interest rates, and the possibility of an all-out trade war is still on the horizon. The effect of such a scenario is something of a double-edged sword for the dollar. While any escalation of the trade disagreements with China is bad for the dollar domestically, its status as a safe haven currency means the effect is neutralized.

When the ECB announced that it would defer rate hikes until next Autumn, it was assumed that the interest rate differential between the dollar and single currency would widen. Now that the U.S. economy is starting to falter, that differential is close to its maximum, since both economies are starting to see falling growth and poor data being released.

The dollar index fell again yesterday, reaching a low of 96.62, closing at 96.76. The market will await next week’s employment report before making a final judgment on the chances of a rate hike in December. The minutes of the most recent meeting of the FOMC said that a further rate hike is warranted but the picture has changed a little in the ensuing three weeks with Chairman Powell turning a little more dovish.

Euro rallies despite dark clouds

There is a significant volume of bad news gathering for the single currency on several fronts. The economy is turning south, the political situation remains clouded in controversy and the departure of one of the major contributors to the EU budget is on the verge of departing imminently without agreement.

Had these headwinds developed earlier in the year when the dollar was at its zenith, the single currency would be trading well below its long-term target of 1.1000. However, the market has turned more difficult to judge and currency strength has become a relative term. The euro is relatively strong versus the dollar, but the dollar is relatively strong versus the pound.

The future path for the euro is dependent upon the fate of the dollar but, in its own right, the economic data is far from supportive and could lead to a longer-term decline which will cause an inflation headache for the ECB which is left with only one policy and that is to “hope for the best”.

It has been said in the past that Central Banks seem to “tinker” too much and not allow natural forces and influences to be a primary driver of monetary policy. That has not been true of the ECB, virtually since the financial crisis. It could be argued that Mario Draghi has enhanced his reputation by doing very little but doing it very well!

The single currency reached a high of 1.1387 yesterday closing at 1.1369. It faces another difficult week next week with the release of activity indices and producer price data, as well as the U.S. employment report.