Prime Minister awaits Brussels reaction to proposals

Yesterday, Theresa May, the Prime Minister of the UK, called her new Cabinet, now shorn of heavyweight Brexiteers David Davis and Boris Johnson together in a show of unity. Her objective was to show that there is Government support for a soft Brexit despite her proposal which is close to no Brexit.

There is a sense of anticipation mixed with concern as we await the full White Paper which will brief Parliament on the complete proposals together with some reaction from Brussels.

The FX market is caught between optimism that a soft Brexit which will allow the UK access to the single market can be achieved and concerns over the political upheaval that such a plan could bring. The pound was in a narrow range yesterday as traders awaited further developments. Versus the dollar it remained in a 1.3302/1.3223 range, closing a little higher at 1.3274.

Manufacturing and industrial production data released yesterday brought a little relief to the market and kept alive the faint hopes of a rate hike next month. Manufacturing production rose by 1.1% in June versus an expectation of 0.9%. This was lower than the May figure, but traders were relieved that it was in positive territory. Industrial production was 0.8% higher than a year ago despite a fall of 0.4% in June.

It is hard to imagine a rate hike while the Brexit negotiations are in such a state of flux and MPC members have barely referred to it. This ploy may give the pound a little support but as we have seen before when no hike becomes evident the reaction is even more violent.

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Trump looking to place tariffs on all Chinese imports

In 2017, the U.S. had a trade deficit with China of $374 billion, It imported $506 billion worth of goods versus exports of just $130 billion.

This disparity provides President Trump with a belief that tariffs on import of Chinese goods have a far greater effect on China that Chinese tariffs on U.S. goods. Furthermore, Trump announced consultations over a further $200 billion of tariffs on a wide range of goods yesterday. The consultation will take two months, so this will remain a threat and little more, for the time being.

Trump has said that he would like to place tariffs on $500 billion of Chinese imports, so, basically, on everything the U.S. imports. The $37 billion of tariffs that began last week have been countered by like for like tariffs by Beijing in a game of “global poker”. China has said it won’t “raise the stakes” by acting precipitously but will keep pace with the U.S., presumably until it reaches the value of the $130 billion it currently imports, whereupon it may consider placing higher tariffs to level the playing field.

Ultimately the decision rests with the U.S. people and their willingness or otherwise to buy the products imported from China despite their increased price.

The dollar index was rangebound, trading between 94.48 and 94.02 yesterday. There is a sense that with the holiday season approaching, the market is unwilling to express any long-term view as the burgeoning trade war continues to expand.

German data pressures single currency

I have said this before, and it remains valid, that there is little reason for the market to react to individual Eurozone states economic data since it has been made perfectly clear by the ECB in general and its President Mario Draghi that monetary policy is determined by overall activity in the entire region.

It is therefore surprising that the euro was sold off yesterday on weaker than expected data for business sentiment in Germany. Since the UK is a very important market for German goods, there is no surprise in the fact that German industry is concerned about the prospect of a hard or no-deal Brexit. In a nutshell, the British like to drive German cars, but have found an alternative to French wine in the “new world”.

The euro had a fairly volatile day yesterday despite closing virtually unchanged on the day. Opening at 1.1750 versus the dollar it had a 1.1763/1.1690 range but closed within six pips of its opening level. It was a similar story versus Sterling as both currencies mark time ahead of further Brexit developments.

It is hard to put a positive spin on the longer-term prospects for the Euro. The withdrawal of the Asset Purchase Scheme has now been “fully digested” but the prospect of no rate hikes for a year will be a drag, particularly versus the dollar. Political issues will continue to spring up particularly given the wide range of views across the region ranging from “hard left” in Greece to “hard right in Poland”.