Time for UK government to deliver

UK Prime Minister Theresa May met with German Chancellor Angela Merkel yesterday and outlined the plans which will hopefully gain Cabinet support for this weekend before “going public” next week.

Merkel, who herself is no stranger to trying to convince colleagues to support a controversial policy, remains sceptical that the proposals will be sufficient to satisfy EU requirements. It is rumoured that there will be an element of cherry picking over which of the four free movements (goods, services, capital and labour) the UK will want to remain part of. It is also vital that the UK come up with a plan for the Irish border.

Some kind of compromise or “fudge” is needed since at the two extremes of the outcome, either an open border with the North remaining part of the customs union and the border being effectively moved into the Irish sea, or a closed border with the consequent delays and red tape will lead to either the withdrawal of support for the Government by the DUP or a veto from Dublin.

It is difficult to imagine this all ending well as May is surrounded by extreme views on both sides of the Brexit argument. There are those for whom no deal is better than a bad deal but also remain supporters who can just about live with the softest of soft Brexits.

The loser in this is most probably going to be the pound which, if it can remain above 1.3000 versus the dollar when the dust has settled, can be considered to have survived the ordeal.

Yesterday, BoE Governor Mark Carney said in a speech that he sees the “Brexit downturn” as temporary. He said that the Bank is prepared for a no deal or hard Brexit, but the EU needs to do more to reach an agreement.

Sterling reacted positively to Carney’s comments reaching 1.3275 but fell back as Brexit concerns returned closing at 1.3225.

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Employment report to provide short-term volatility as traders awaits trade announcement

The FX market has been waiting for clarity over several issues, but it won’t have to wait much longer as the “stars begin to align.” With the Brexit proposal likely to be announced on Monday, the White House is poised to enact the trade tariffs it announced recently on around 35 billion dollars’ worth of imports from China, then at the weekend announce how it will legislate against investors who steal the intellectual property rights of U.S. businesses.

The major talking point is how the legislation will be aimed. If it is “China Centric” then we can expect Beijing to retaliate against U.S. firms operating in China. There appears to have been disagreement between two senior White House Officials with Treasury Secretary Mnuchin saying that the issue is more widespread than just China while Economic Advisor Kudlow leads a group who are hawkish towards China.

Before the trade issues are dealt with, the U.S. will release the employment report for June. As the headline non-farm payroll number is so unreliable, analysts have taken to using the six-month moving average as their “best guess” for the data.

If the pattern of recent releases is repeated, an “outside the range” number tends to be followed by both an adjustment making the previous month’s figures more “believable” and a back within range number. Given the aforementioned, I see 175k new jobs and a 15k-20k adjustment lower in May’s data.

Wage inflation is also eagerly awaited with a rise to 2.8% needed to verify the Fed’s view of two more rate hikes in 2018.

Yesterday, the dollar index fell, testing support at 94.20 as the euro rallied. It appears to be simply marking time ahead of a busy day that will probably continue into next week. The effect on risk sentiment of the trade announcements will have a major effect of the dollars movements.

Euro rallys on German data but monetary policy still driving long-term sentiment

At some point in the, not too distant, future, the Eurozone will no longer publish data from each individual state. It is somewhat confusing and has no real bearing on the monetary policy since comments from the ECB show that the economy of the entire region is what they consider when deciding monetary policy.

In any grouping of economies, there will be some that are richer than others and that depends on many factors. It is as true in the U.S. and it is in the Eurozone although traders do not get hung up on Texan industrial production or the inflation rate in Iowa!

So, for traders to buy the single currency yesterday, apparently in response to stronger than expected German factory orders, appears a little like finding a story to fit the headline.

Be that as it may, the single currency reached a high of 1.1721 before falling back a little to close at 1.1691.

With the interest rate and Asset Purchase questions seemingly put to bed and political issues “kicked into the long grass” the euro faces a reactive summer. That situation could change if the immigration debate stirs again as the elections in Bavaria confirm a rise in support for nationalist parties but, for now at least, the euro will fulfil its role as the majority of the dollar index.