Brexit Split set to hit Pound

Hard versus Soft Brexit row to rumble on

There is a distinct lack of leadership being exerted by British Prime Minister Theresa May as Brexit negotiations continue. Her Ministers now seem to be willing to talk about major policy changes without any reference to or apparent approval from her.

The subject of a Brexit transition period, how long it should last and how it would work is a major development, yet it is happening while she is on vacation.

The pound has so far reacted positively to the possibility that there could be a transition period perhaps lasting until 2022. Without really having any detail to work with traders have been prepared to buy Sterling on the premise that anything which softens Brexit must be positive for the currency.

The pound continues to drift against the Euro but has made significant strides against the dollar reaching 1.3150. The current weakness of the greenback, as evidenced by its precipitous fall versus the common currency, is the prime driver of Sterling’s rise.

The Euro has failed to breach the 0.9000 level but since its correction has been shallow a further test is probable.

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Trump’s woes driving dollar

The U.S. economy performed reasonably well in the second quarter of the year. The Federal Reserve has raised rates twice, widening the interest rate differential with other G7 economies and yet the dollar index has fallen by 10%.

The economy has seen growth seemingly despite President Trump’s inability to work with Congress and the Senate to enact a repeal of Obamacare. This has led to concerns over whether his, much vaunted but so far invisible, fiscal reform and economic stimulus bills will see the light of day.

Trump is finding the transition from campaign to Government almost impossible and his lack of Presidential gravitas is adding to his seeming isolation.

History shows us that a good President surrounds himself with an experienced, professional well-regarded team. While there is no direct comparison for Trump, the closest is probably Reagan although he did have experience of Government having been Governor of California.

Reagan’s most significant act was to appoint a cabinet who had “been around the block” and had experience of “getting things done”.

More than six months into Trumps Presidency he has continued a hire and fire mentality totally unable to get on with the job of Governing.

Economic data unlikely to deflect political concerns

The first week of a new month brings a whole raft of economic data releases usually culminating in the eagerly awaited but wholly over-hyped U.S. employment report.

Australia has already released inflation data which, while higher than last month, is not strong enough to lead to a hike in rates when the RBA meets tomorrow.

Eurozone inflation figures will be released later this morning with the headline year on year number expected to be a benign 1.3%. Growth is a far more immediate issue for the ECB than inflation as evidenced by President Draghi’s concerns to ensure that changes in monetary policy don’t bring inequality.

Manufacturing and Services surveys will be released in the U.S. and Eurozone. They are both showing expansion but moving in opposite directions. The Eurozone is reporting in the high fifties while the U.S data if struggling to reach fifty-three or four.

Eurozone preliminary Q2 GDP, released tomorrow is likely to rise above 2% following Q1’s respectable but hardly earth shattering 1.9%.

The BoE MPC meets on Thursday with a rate hike firmly off the table. Voting will hold an academic interest as a new member casts her first ballot and the hawks provide their view on the economy.

This week’s events of note

A week of data releases will be inevitably dominated by the U.S. employment report on Friday. Prior to that traders will be looking for data to back up recent hawkish Central Bank comments