Deal or No Deal? For Cable 1.2500 Will Tell the Story

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Market Drivers September 19, 2019
UK Retail Sales mixed
BOJ holds
Nikkei 0.38% Dax 0.35%
UST 10Y 1.77%
Oil $58/bbl
Gold $1497/oz
BTCUSD $9898

Europe and Asia:
GBP UK Retail Sales -0.2% vs. 0.2%

North America:
GBP BoE Meeting 7:00

The FX markets were generally steady in overnight trade with the dollar weaker against the European currencies but up against the commodity dollars which continued to suffer from weak economic data.

The dollar declined slightly in the wake of the 25bp FOIMC rate cut which was widely expected. Fed Chair Jerome Powell remained absolutely non-committal as the Fed’s next policy steps but did open the possibility to fresh balance sheet expansion in case of an economic slowdown. Overall, the neutral mood provided little support for the dollar which had already rallied into the meeting and the combination of neutral BOJ which kept policy unchanged provided a perfect setup for some profit-taking in USDJPY which dropped below the 108.00 level.

Meanwhile, in commdollar land, both Aussie and kiwi remain weak against the dollar after overnight data suggested a further slowdown in those economies. Although headline data looked robust it proved deceptive. In New Zealand the better than expected GDP reading which came in at 2.1% vs. 2.0% eyed was still the slowest pace of growth in 5 years and suggested that RBNZ will maintain its easing bias. In Australia, the strong 41K print in employment reading masked the greater than -15K decline in full-time jobs showing that labor demand is more fragile than expected and opening the door for further RBA cuts in the fall. The Aussie dropped below the .6800 level and remained there through Asian and early London dealing.

In North America today the calendar is barren but all eyes will be on Bank of England which is expected to keep rates unchanged but maintain its neutral bias. The monetary policy decision takes place against the frenetic maneuvering on the Brexit front as Mr. Johnson and his allies try to solve the Irish border issue. As we noted last week we believe that Irish border sovereignty will be sacrificed for the sake of Brexit as Mr. Johnson and his allies realize that unless they accept the EU terms there may never be a Brexit at all.

The Northern Ireland border issue was always a political sideshow with no economic benefit to the Brexitteers. The far bigger prize of leaving the EU while remaining in the customs union has already been secured in negotiations and if Mr. Johnson does not accept that deal he will be forced to ask for an extension as mandated by Parliament law which in turn will likely turn into calls for a second referendum which the Brexiteers could easily lose. Thus, the sudden pick up in diplomatic activity between UK and EU and UK and Ireland suggests that Mr. Johnson and his allies are merely looking for some face-saving gesture on the Northern Ireland border issue so that they can complete the Brexit deal.

Cable has been flirting with the 1.2500 figure for the past few days as markets sense that some breakthrough may be coming and if news leaks of any progress in talks the pair could quickly chew through offers in that area and push towards 1.2700 on the assumption that hard Brexit will not happen.

Boris Schlossberg
Managing Director

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