Brexit overshadowing tentative economic improvement

The UK economy has been badly impacted by Brexit and the prospect that it will be several years before the country can get back to the level of growth seen before the decision was taken to leave the EU.

Business investment remains sluggish due to the uncertainty caused by Brexit rather than the actual effect of leaving the EU that is hurting the currency. The pound has managed to cling onto the 1.3200 level versus the dollar despite concerns over the outcome of the latest round of Brexit negotiations, which start next week, with a new Brexit Minister who, oddly, has even greater “leave” credentials than his predecessor.

The pound was lower against the dollar yesterday, but it was in reactive mode as the dollar gained across the board. The economic and political drivers for the pound are being viewed in the context of a possible rate hike next month. It is difficult to imagine that concerns over inflation are strong enough to persuade the MPC that a hike, which would, probably, need to be reversed next year, is needed.

With arch-hawk Ian McCaffery leaving the MPC in September to be replaced by Jonathan Haskel, who, on the strength of his confirmation hearing, is far more dovish than his predecessor, this may simply be the final chance for some time for rates to rise.

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Dollar gains as data points to two further hikes this year

If we were living in “less interesting times”, the greenback would be trading far higher with the dollar index closer to 100 than 90 since the major driver of currency strength, the interest rate differential, is firmly in its favour.

Producer prices, which are a significant indicator of future CPI rises, were released yesterday and showed their biggest increase in more than six years which gave support to the dollar. Year on year, the cost of goods at the factory gate rose by 3.4%, appreciably higher than the 3.1% seen in May and above the most bullish expectation of analysts by 0.2%.

The Fed’s aggressive desire to return interest rates to “normal” levels has one serious flaw following such a long period of low interest rates, a factor that is certain to remain in place well into 2019 That flaw is “what is normal” in today’s financial markets. Globally, inflation is hardly an issue despite the outcry when rates were lowered to close to zero and in some cases beyond to stimulate growth and Central Banks pumped funds into the market by adopting QE, the subject of many theses but barely seen in action.

The U.S. economy has an “artificial” feel to it currently with tariffs to slow imports having little effect and interest rates being raised for what appears to be little reason.

The dollar index rallied following the PPI data reaching 94.77 but still doesn’t appear to have sufficient momentum to break through significant resistance at 95.25.

Euro “packing its bags for summer”

Euro “packing its bags for summer”.
Since a whole new set of drivers were released for the single currency last year in the shape of political upheaval, the euro has been driven by outside factors. Those factors ebb and flow mostly in reaction to elections, with three of the more significant economies, The Netherlands, France and Germany voting in new Governments or renewing the mandate of others.

The creeping growth of right wing politics is being seen most in Eastern Europe with Poland and Hungary lurching in that direction and a strong showing for the right-wing Action for Germany Party in Berlin.

The reforms of the EU are still being held in abeyance while the immigration issue remains a hot topic. It has just about been agreed that it is a problem for the entire EU, but this remains on people’s minds on the streets of Budapest and Warsaw.

The euro remains in a holding pattern, searching for new factors to provide some independent impetus but while it makes up close to 58% of the dollar index, it remains subject to the vagaries of the greenback and all that entails.

Yesterday the single currency fell back towards recent lows as the dollar strengthened. It reached a low of 1.1655 before recovering a little to close at 1.1673