Hard Brexit and Data hit Sterling

May Clutches at straws

Theresa May the U.K. Prime Minister told EU leaders in Brussels last night a new dynamic is necessary for Brexit to be successful and that Europe needs to “stand together to protect its people”.

In an echo of her speech last month in Florence, May said she believed that progress has been made in the talks although the two sides remain poles apart on the three key issues that the EU has demanded firm proposals on before talks can move to stage two. Today the UK will be excluded from the summit as Brexit is discussed in detail. The bill for departure from the EU is the major stumbling block and this has become a political hot potato amongst Mrs May’s Ministers and is the most telling symbol of the gulf that has developed.

Opposition leader Jeremy Corbyn is also in Brussels for talks on Brexit and will meet Chief Negotiator Michel Barnier this morning.

German Chancellor Angela Merkel said she was encouraged by the negotiations but nothing that has happened so far leads her to believe that talks regarding a trade deal can be started yet. A “hard Brexit” remains a real possibility and the resolve of both sides is sure to be tested as there are no plans for budget discussions before year end.

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Fall in Retail sales Jolts Sterling

The consumer has been a solitary bright spark in a weakening U.K. economy recently with August’s retail sales data proving to be very strong. The September data which was released yesterday more than reversed that strength falling by 0.8% and dragging the quarterly figure to its lowest since 2013.

The pound reacted poorly to the data falling against both the dollar and euro, reaching 1.3100 and 1.1086.

Interest rate futures are still backing a rate hike next month even though data and recent comments from MPC members say otherwise. Next week sees the release of the first cut of third quarter GDP in both the U.K. and U.S. With business investment badly affected by Brexit fears, year on year growth of 1.5% is the best that can be expected for the U.K.

BoE Governor Mark Carney and Chief economist Andrew Haldane have both said that a rate hike will be necessary in the “next few months”. This will reverse the “knee jerk” cut that took place immediately following the Brexit referendum vote but any further hike, early next year, now looks very unlikely. The recent OECD report which called for consideration of a reversal of the Brexit decision was ill-timed but set out what many are now thinking.

Eurozone rates on hold but policy likely to tighten

Next week the Governing Council of the European Central Bank will meet to discuss monetary policy. There is no question of a hike in rates although the pace of the tapering of the Asset Purchase scheme will be on the agenda as promised by ECB President Mario Draghi.

Sr. Draghi refuses to countenance comments from individual Central Bank officials and Government representatives taking his responsibilities to the Eurozone as a whole very seriously.

This week the Governor of the Banque de France has called for the removal of extraordinary measures by year end and a steady normalization of interest rates. The ECB is still concerned that any unforeseen shock could reopen worries over growth which isn’t yet strong enough across the entire region.

The single currency continues to trade with a stronger bias which is helping to control inflation. Any further strength will concern countries with fragile export markets and will draw further comment about ECB actions.

Next week also sees the release of Purchasing Managers indexes which will most probably continue to show strength in both the manufacturing and services. This will bring further pressure for a normalization of rates in the first quarter of next year.