Politics Holding Sterling Back

MPC to receive inflation guidance

Today’s release of inflation data in the U.K. should provide traders with further guidance as to the likelihood of a rate rise at the next MPC meeting. That meeting, being held in two weeks’ time on August 3rd is being seen as pivotal as the balance between tighter monetary policy and economic activity becomes more difficult to maintain.

Concerns over a slowdown in economic output are weighing heavily on Sterling despite the currency rising to a level against the dollar not seen since last September.

The pound’s rise against both the dollar and euro over the past couple of trading sessions has been driven by those currencies weakness rather than any strength of its own.

The market expectation is for headline inflation to be unchanged from May at 2.9%. The recent relative strength of Sterling could lead to a slight surprise to the downside. It is likely, however, that anything below 3% will be viewed with relief by the more dovish MPC members.

Sterling remained well above the 1.3000 level against the dollar but fell a little against the euro reaching 0.8825 as the common currency recovered from its technical correction on Friday.

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Brexit Negotiations start in earnest as Government infighting continues

The Brexit Bill, the fate of EU residents living in the U.K. and the border between the U.K. and Ireland are the three key issues the EU Chief Negotiator wants to be close to settled before any talks about how the U.K. will access the single market in goods and services.

Speculation and leaks appear to be how news of any agreement or otherwise will be disseminated since no formal programme of news conferences or releases has been announced. It is probable that David Davis and Michel Barnier will provide snippets of information as and when it benefits their cause the most.

Davis, quite apart from tricky negotiations with Brussels is also facing an outbreak of infighting within his own party. He is the “Champion of Hard Brexit”, adopting a confrontational stance from day one. This pits him against the Chancellor, Philip Hammond, who favours a softer stance. Government Ministers and backbenchers are using the time-honoured tradition of gossiping to the press as their favour method of showing support or otherwise.

The Prime Minister, hardly able to dominate the party as her own support wanes is sounding hollow in her calls for unity.

It is going to be a long summer for the Conservative Party.

Euro recovers as dollar slips

The single currency has finally broken above the 1.1500 level against the dollar and regained some ground lost against the pound reaching 0.8825.

The Euro is at a crossroads against the dollar as a likely widening of the interest rate differential should provide some support for the dollar. It is ironic that there is concern over monetary policy in both economies.

Janet Yellen is constantly being questioned over the need for rate hikes whereas Mario Draghi must explain why he doesn’t see the need for such changes. Both economies are growing but history shows that the ECB is more conservative than the Fed in its reactions. The ECB is still trying to understand and gauge the reaction across nineteen diverse economies of its policy so a little reticence is only to be expected.

The ECB meets this week before its members disappear on the summer vacations. No changes are expected but analysts will study Draghi’s press conference for any changes or inference in his reaction to economic activity.