Sterling Direction Data Driven for now

Weak data to substantiate MPC decision

The pound fell through the psychologically important 1.3000 level yesterday as traders accepted that the U.K. economy is weakening and confidence, both commercial and consumer driven, is falling.

Today’s release of growth data from an independent think tank should confirm the view that the economy has slowed to a crawl and is in danger of slipping into negative territory. The NIESR provides up to date growth data on a month by month basis. Since official data is released quarterly this provides a timely indicator to the Bank of England of growth patterns. The GDP estimate should show 0.2% growth in July, a slight fall from the 0.3% seen in June

The MPC decision to keep rates on hold is likely to be repeated for some time as activity slows.

Today’s manufacturing and industrial production data should to continue their recent weakness. Industrial production probably fell 0.2% month on month following June’s 0.1% fall. Manufacturing could fare a little better being flat on the month continuing the general slowdown in activity.

The pound continued the downtrend that commenced following last week’s MPC decision, breaking the 1.3000 level against the dollar, reaching 1.2968 before recovering a little.

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Political and Economic concerns to provide backdrop through Q4

Event risk is usually considered to be effect of an unforeseen event on a currency, stock or economy. However, in the case of the U.K. and Sterling, the coming events are well documented and lining up to weaken both the economy and currency.

As ministers drift back from their summer holidays, the pressure is going to build for agreement on a decision over the amount the U.K. will offer the EU as a fee for departing the EU. A proposal over a transition period following Brexit will also need to be agreed. That will, however, be subject to acceptance from Brussels and will doubtless bring about demands for further concessions.

Disagreement over the future treatment of EU citizens in the U.K. remains although the EU appeared to soften its stance over the fate of U.K. citizens remaining in EU nations yesterday.

The overriding feeling is that the past year has been wasted on logistical matters rather than reaching agreement over the terms of Brexit. Michel Barnier the EU Chief Negotiator is clearly frustrated over the lack of progress where even the basics haven’t been decided.

Global tensions affect risk appetite

The “traditional” safe haven currencies fared well yesterday as the rhetoric over North Korea’s nuclear ambitions continued.

Overnight, Pyongyang confirmed that it is planning to launch missile tests that will land in the sea close to the U.S. pacific territory of Guam. Senior U.S. officials backed President Trump’s “fire and fury” warning. Secretary of State Rex Tillerson reassured Americans that they were safe and that the issue hadn’t escalated significantly. Secretary of Defense, James Mattis warned President Kim that in any conflict he would risk regime change and the destruction of his people.

The Swiss Franc rose by close to 1.75% against the dollar. It had its biggest move since the SNB removed the peg, holding it at an artificially low level against the Euro, in January 2015. The Yen is hovering around 110.00 versus the dollar having been trading close to 114.00 ten days ago.

Equity markets have corrected as risk appetite drops. President Trump has been clear that the U.S. will not be dictated to by Kim Jong-Un and North Korea cannot be allowed to achieve a nuclear capability.