Inflation data inconclusive

Gone are the days when a Janet Yellen driven Fed. would be expected to react to inflation data that was inconclusive at best. While traders are yet to “get a fix” on where Jerome Powell intends to take monetary policy, there is little doubt that the days of pre-emption are over.

The dollar resumed its fall following the data as equity markets continue to rally following the recent fall which now bears the hallmarks of a classic correction although the end of “cheap money” is not far away.

Sentiment can be one of the most powerful drivers in the FX market and can turn seemingly out of a “clear blue sky”. Suddenly the dollar looks extremely vulnerable having reached 1.2500 and 1.4000 versus the Euro and Sterling but trying to hang the reason one piece of the macroeconomic data is impossible. A different day a different driver seems to be the order for now.

The market is confused by what the Fed intends to do. While rates are set to increase, the market is unsure just how hawkish the Central Bank intends to be. There is no clear path for inflation and the recent move has been based virtually on a single wage inflation report which could easily be a one-off.

Johnson goes “off piste”

Boris Johnson the UK Foreign Minister gave a speech yesterday in which he tried to “debunk” the theory that membership of the customs union and single market is a benefit that is “irrefutable and conspicuous”. Without commenting on why being outside could be beneficial, Johnson went “off piste” as has been his wont, providing what he considers to be a counterbalance to the headlong rush into a soft Brexit.

It is unclear just how much approval Johnson has from his boss, the Prime Minister to put the alternative case for Brexit but it does two definite things; it weakens Mrs May’s position and it confirms the muddled thinking that continues to pervade the Cabinet as it wrestles with providing the least damaging Brexit economically it can.

The Brexit Bill still hasn’t passed through Parliament, so, with the clock ticking, the amount of work still to be done at home without even considering the agreement of a transition period leading into the “main event” of the future relationship time is becoming increasingly precious.

Sterling is failing to react to the uncertainty as the market in similar fashion to the Bank of England ignores what is coming.

Euro making serene progress despite Politics and Draghi

The Euro is again approaching resistance at its medium-term target of 1.2520 as traders disregard the ECB’s clear desire for it not to rise any further and the possibility of a destabilizing election in Italy.

It seems that the Italian election will be won by a centre-right coalition driven by Silvio Berlusconi’s Forza Italia Party supported by the Northern League, a group with clear anti-EU and anti-Euro policies. The League is standing on a platform calling for reform of Brussels immigration and fiscal policies. It is also demanding an apology from Brussels for the “destruction” of the Italian economy”. A slight over-exaggeration but it illustrates perfectly the depth of feeling that is pervading Italian society.

Another Brexit type threat could spell the end for any thought for the kind of reform and further federalization of the EU for a generation.

With the election taking place in a little over two weeks, the result will loom large in traders thinking and provide a fitting climax to an uncertain first quarter where markets have had to get used to a succession of drivers that provide almost polar opposite reactions.

 

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