Rate Hike Hopes Support Pound

Consumer continues to support economy

The chances of a rate hike at the November MPC meeting were increased yesterday as a measure of retail sales activity beat analysts’ expectations by some distance. Mark Carney the Bank of England Governor maintains that he considers trends rather than one off data releases when reviewing monetary policy actions.

The pound has risen by 6% versus the common currency since its nadir reached on August 29th. A combination of a possible tightening of monetary policy in the U.K. together with the fallout from the German election have been the primary contributors. Versus the dollar the pound has retraced a little from its highs as a hawkish Fed has provided support for the greenback.

Concerns over Brexit remains a major drag on the pound and will continue until a breakthrough in the talks provides some insight into how the U.K. and EU will interact following the U.K.’s departure. The optimism engendered by the expectation of Theresa May’s speech in Florence is slowly dissipating as the reality of the stalemate over the U.K.’s proposals for the financial and free movement questions posed by Brussels remain. Governor Carney will speak later but his words are likely to be neutral as he ponders the ramifications of higher rates on a weakening economy.

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Euro continues to weaken a Merkel Fires Schäuble

The fallout from the German election at the weekend continues as Chancellor Merkel tries to stitch together a coalition from the remaining groups as the next two highest polling parties form a formidable opposition.

Wolfgang Schäuble the Finance Minister for the past eight years and the architect of austerity seen during the Eurozone debt crisis has lost his job which will bring wry smiles to Athens. A measure of the power wielded by Schäuble can be seen from the comments of the former Greek Finance Minister. Yanis Varoufakis, at the height of the Greek budget crisis, maintained that he wasn’t negotiating with the EU just Germany, and Schäuble in particular.

The job of Finance Minister in the new German Administration is the most senior position after Mrs Merkel and is coveted by the leaders of both coalition parties. Schäuble won’t be disappearing from public office however. He has been asked to become the President of the Reichstag.

There can be little doubt that Germany’s position as the flag bearer for the Eurozone has been considerably weakened as Mrs Merkel will be forced over the coming months to concentrate on domestic matters. Another election is not out of the question as Merkel struggles to negotiate with the FDP and Greens.

Labour Prepares to Govern

To say there has been a remarkable turnaround in the fortunes of the opposition Labour Party in the U.K. is a considerable understatement. From a Party that was unelectable, scrabbling around trying to find a credible leader and seeming to be mired in the past they, in their own words, are now preparing to govern.

There are still doubts over their plans for public spending, government borrowing and Brexit but having been handed a lifeline by the ineptitude of the current Government, they have grabbed it with both hands. As a P.R. exercise, the promotion of Jeremy Corbyn as a credible Prime Minister is something of a triumph particularly considering his seemingly outmoded and outdated politics.

There is still a huge gulf to be closed between hope and expectation but should Theresa May’s Conservatives falter, Labour has proved itself willing if not necessarily able.

Brexit will be the only issue at an election held in the near future and it is likely to prove to be just as beyond the wit of labour as it is proving for the Conservatives. Corbyn would have been far better served by offering to share responsibility in Parliament than telling the Prime Minister to “move over and give him a go”.