Review of the foreign exchange market on 10/31/2018
British parliamentarians cannot sit in silence, and they constantly need to express their new brilliant thoughts and ideas. Yesterday the political opponents of Theresa May announced that they intend to pass a law that would make a free trade even just temporarily between the European Union and Northern Ireland illegal. It is necessary to clarify that while the parties cannot close the issue of trade interaction between Ireland and Northern Ireland, causing the Europeans to suggest temporarily leaving the northern part of the island, which is part of the UK, within the framework of a single European market at least until this issue is resolved. This is part of the so-called soft withdrawal from the European Union. It also implies an annual transition period in order for the parties to bring their legislation in line with the “divorce” agreement. However, this option does not suit the conservatives, who have a majority in the English parliament and now they are going to legally prohibit even the thought of such an option.
And this makes it impossible to reach an agreement between the UK and the European Union. So, most likely, the “divorce” will take place according to the toughest option, that is, without any agreement. This threatens the British economy with many unforgettable moments but it was Theresa May who was appointed to blame for the painful consequences. In other words, the political opponents of the Prime Minister set their political goals above the future of the British economy and it is not surprising that the pound on this background is rapidly losing its position. However, the option of divorce “agreement does not suit the conservatives who have a majority in the English parliament, and now they intend to legally ban even the thought of such an option.
But even without this, there were enough reasons for the growth of the dollar from 2.1% to 2.2%, despite the fact that the growth rate of the European economy in the second quarter was revised for the better. Yet there is no point in rejoicing since a preliminary assessment showed that in the third quarter, economic growth rates slowed down to 1.7% and it is obvious that with such a strong slowdown in economic growth. Mario Draghi will think ten times before fulfilling his promise to curtail the action of the quantitative easing program. So, the printing press will print multi-colored banknotes under the name of euro next year, at least investors are sure of this. However, the dollar growth was restrained by the S&P/Case-Shiller data on housing prices in the US, whose growth rates slowed from 5.9% to 5.5%, which somewhat reduces more precisely the possibility of renewed inflation.
In the US, preparations for the Friday publication of the Department of Labor report are starting today and ADP data on employment is expected to be published. It is predicted that it will grow by 189 thousand compared to 230 thousand in the previous month. Also, the publication of the report of the Ministry of Labor is not the most optimistic data.
Meanwhile, the preliminary inflation data will be published in Europe, and it is expected to accelerate from 2.1% to 2.2%. However, there are serious concerns that these expectations were not destined to be justified since the data on retail sales in Germany turned out to be so terrible that it was time to queue for Corvalol. Not only that the previous value of the growth rate of retail sales was revised from 1.6% to 1.5% but now they are no longer growing and reduced by 2.6% instead. It is unlikely that inflation can grow amid such an impressive decline in consumer activity in the largest economy in the euro area. Even if it grows up, there is simply no point in curtailing the program of quantitative easing with a catastrophic fall in retail sales. Also published data on unemployment, the level of which should remain unchanged. Hence, it will not have any effect on the market. Nevertheless, if inflation forecasts are confirmed, the single European currency has good chances to grow to 1.1425. If the data disappoints investors, it is worth waiting for a decline to 1.1300.
The pound is preparing for tomorrow’s board meeting of the Bank of England, and no data comes out. However, we should not exclude from the mind of the British parliamentarians, who with a zeal worthy of better use continue to dig out a shallow grave for the pound. But internal political squabbles are much more interesting, so they are the ones who now determine the behavior of the pound. Thus, if the next loud statements will not be heard from Foggy Albion, and inflation forecasts in Europe are confirmed, the pound is waiting for growth to 1.2800. Otherwise, he will have to go down to 1.2675.