Morning Commentary: Brexit Knots – Chicken or the Egg?

Foreign Exchange - Morning Commentary
Brexit Knots – Chicken or the Egg?
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, markets are subdued and lackluster once again. Despite a plethora of news, headlines, economic data etc. all week long, the needle has hardly budged for the past three days. Equities, interest rates, commodity prices and the DXY all remain in tight ranges, experiencing only small micro-movements. However, Brexit continues to be the gift that keeps on giving, providing short term stimulus for the markets.

Brexit has now morphed itself into a chicken versus the egg story. In a nutshell, the EU has put off a decision on a time extension for a Brexit vote for the U.K. until Parliament votes on an election; French President Macron is blocking an extension for three months in hopes of putting more pressure on Parliament to act. Within Parliament, a 2/3 vote is needed to approve an election and Labor leader Jeremy Corbyn says his party will only support an election if Europe grants an extension. After soaring the previous two weeks, the British pound has seen modest corrections lower all week long as uncertainty continues to mount.

As the Brexit drama continues to mutate, the background issues of U.S.-China trade, the Middle East, impeachment hearings, etc. combined with the upcoming FOMC meeting next week will keep investors and traders close to home. Market psychology has priced in enough expectations for all these events for the time being; expect more range trading leading into the FOMC decision on October 30 unless of course, market dynamics change again.
  • The Bank of Russia sped up the pace of monetary easing by delivering its biggest rate cut since 2017 today, cutting interest rates from 7% to 6.5%. The central bank has already cut interest rates three times this year. Sluggish domestic growth and continuing declining inflation have allowed the central bank to continue to be proactive. The Russian ruble is stronger on the session and near its best levels for 2019.
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