A combative atmosphere pervaded this morning’s market open, after former New York Fed President, Bill Dudley, wrote a Bloomberg op-ed suggesting an anti-Trump policy stance for the Fed, and a rumour surfaced that Queen Elizabeth may be called to pro-rogue parliament in order solidify Boris Johnson’s No-deal Brexit threat.
Dudley’s comments have already drawn a lot of criticism for foisting the Fed into the political arena, a position it strives to avoid at all costs, given Donald Trump’s disparagement of their policy action. However, a few of Dudley’s statements could be considered fair, such as his description of Trump’s trade war and its impact on the economic outlook. It is also fair to suggest the President’s agenda is to bait the Fed into easing, allowing him to pursue trade war escalation. Where this argument breaks down however is the suggestion that the Fed should curtail Trumps agenda and, even his re-election, based on a political motivation. This line of attack would only add a veil of legitimacy to Trump’s Fed bashing by fleshing out a nest of political opposition at an ostensibly technocratic intuition. This simply won’t end well for Jerome Powell and the Federal Open Market Committee.
Just as Boris Johnson is beginning to make some headway with EU leaders by narrowing his point of attack to the Irish backstop, he is also working to shore up his political artillery. Opposition politicians have attempted under various guises to disable the Prime Minister’s ability to deliver a hard Brexit on October 31st, but without success. It’s rumoured that Boris is preparing to ask the Queen to pro-rogue Parliament until mid-October which would seriously undermine opposition efforts to curb the PM. From one perspective, the real possibility of no-deal is a crucial bargaining chip to arrive at a deal that has broader support than Theresa May’s foundlings. On the other hand, it is difficult to conceive of a way we might hurdle the Irish border issue with no inspiration forthcoming from Number 10.
Bottom line: The gloves are firmly on the ground, dukes in the air. Not surprisingly, Cable is making a move lower on the increased prospect of no-deal. Just maybe, we might see some Dollar strength based on greater perceived opposition to Trumps trade war agenda. In the meantime, there is little data out today, so politics are driving markets and the tone seems strongly risk off.
The pair trades heavy this morning amid reports that the UK government will ask the Queen to suspend Parliament. The news has eroded last week’s gains and trades are back below 1.22. The Pound Index is now well below the 200-daily moving average, following August’s rally which sent the index less than one point away from the key level.
While the Euro trades flat, Brexit news that’s currently influencing the Pound will be the likely driver of the pair for the remainder of the week. This morning, the pair traded back below 1.10 following reports that the UK government will ask the Queen to suspend Parliament when MPs return from summer recess next week.
The pair continues to trade flat near the 1.11 handle, while the Euro Index remains at the bottom of its year-to-date trading range. This week’s light calendar of economic data provides reason for low volatility to persist for the remainder of the week.