Johnson to keep pressure on May

In his resignation speech to Parliament yesterday, Boris Johnson, the former Foreign Minister, was scathing in his comments about Prime Minister Theresa May. His comments were the perfect illustration of the deep, possibly fatal, divisions that are currently splitting the Government in two.

Mrs May is steadfast in supporting her “Chequers Plan” despite several amendments brought about by the “Brexiteer” wing of her Party. Johnson commented that the Prime Minister has “descended into a fog of indecision” and said that her proposals show how she has abandoned the terms she referred to in her speech in January last year where she hinted at a “comprehensive bold and ambitious” free trade agreement.

Parliament is about to rise for the summer recess during which it is hoped that May can persuade the Heads of Government of the EU that her plans represent a real chance for a workable relationship. That remains to be seen, but there have been some positive noises from individual members, each of whom has their own agenda towards a relationship with the UK.

The Prime Minister looks certain to survive a tumultuous week in which she has “celebrated” two years as Prime Minister. The storm clouds have gathered, ironically mostly driven by her own Party, while the opposition show a greater appetite for an election than solving the Brexit conundrum.

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Data remains an important factor

Brexit remains the most important factor in the UK economy, pervading every facet of the country. However, the pound had been unreactive recently, taking more direction from potential monetary policy changes than the UK’s departure from the EU.

This week has been a significant one for economic data. On Tuesday wage inflation fell back, a sign that despite record low unemployment, businesses are holding very tight to their purse strings. Yesterday, inflation remained seemingly on a downward path although Producer Prices, the cost of raw materials at the factory gate and a precursor of future CPI, rose above 10%.

I am reminded of the rise in the pound a few months ago when the market got very ahead of itself in its hopes for an interest rate hike only to have those hopes dashed. That was the catalyst for the recent fall of around 9% in the value of the pound versus the dollar.

Traders had been clinging to hopes for a rate hike next month even though BoE Governor Carney expressed concerns earlier this week over the effect of a hard Brexit which could lead to an emergency rate cut. The inflation data seemingly ended those hopes and the pound fell accordingly making a low of 1.3010 although it rallied later in the day to close at 1.3068. Versus the euro it made a low of 1.1196 and remained on the backfoot, closing at 1.1229.

Dollar rallies on economic divergence

It is an adage of the financial markets that Central Banks tend to get what they want, eventually. The value of the dollar has been the subject of much speculation since President Trump came to office. The blurring of the responsibilities of the Federal Reserve and Treasury has led to a little confusion. Treasury Secretary, Steve Mnuchin, has little other than words to alter the dollar’s course while Jerome Powell, the Chairman of the Federal Reserve can back his words with deeds.

Powell’s testimony to Congress and the Senate this week has been unashamedly hawkish, providing a positive view on the prospects for the U.S. economy and, in turn, monetary policy. The value of the dollar may not be Powell’s responsibility, but he has certainly played a major part in its rally this week. He also, as expected, made light of the effect of the burgeoning trade war between the U.S. and China, minimising any fears over growth.

The dollar index rallied further reaching a high of 95.41 before closing at 95.11, still unable to break and hold above significant resistance at 95.25. The effect on the single currency was to push it lower, reaching 1.1602, although it has bounced back a little overnight.