Sterling rises above 1.3000 versus dollar

Michel Barnier, the EU Chief Brexit Negotiator, spoke yesterday of how close the two sides are to a deal and that any agreement would be “unlike any other deal with any third country”.

In a knee-jerk reaction to Barnier’s (assumed) more positive stance, the pound, driven by the market’s relief that the likelihood of a no-deal Brexit faded, soared to highs of 1.3034 versus the dollar and 1.1132 versus the euro.

For this rally to be sustainable, there will need to be some follow through with evidence of an agreement on several difficult issues or it will simply provide Sterling bears and Brexit hawks with a more advantageous level at which to sell.

While this positivity made the headlines and pushed Sterling to recent highs, there is still an undercurrent of concern over the physical ability of a deal to be struck in the time left.

Also, the major remaining issue of the Irish border is no nearer to a resolution. It is hard to see how there can even be an interim solution since the two sides positions are very clear. They are driven by the threat of a veto from the Irish Government on one side, and the danger of withdrawal of support for the British Government on the other.

The rally in the pound is a clear testament to the “soft Brexit good, hard Brexit bad” mantra that has pervaded the talks virtually since day one. Until there are concrete proposals acceptable to both sides on the table, any rally is built on the shifting sands of uncertainty.

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U.S. GDP revised higher

There was a surprise revision higher in U.S Q2 GDP when the “second cut” was released yesterday. It was revised from 4.1% to 4.2%. Market reaction was muted for two reasons.

First the stellar performance of the economy in Q2 was well known and it was backed by several unsustainable drivers and, second, “forward facing” traders are now far more interested in just how much lower Q3 will be than Q2. The question will then be asked, “if the various stimuli from Q2 are stripped away how much “core” growth has there been in the economy this year?”
The dollar continues to correct with the index, affected in part by Sterling’s rally, falling to a low of 94.53 and closing within a pip of that level.

While economic activity remains shrouded in stimuli, trade remains a major driver for the dollar and with this week’s unexpected rise in the deficit to $72.4 billion, the market is expecting a reaction from the President in the form of further tariffs or the threat of a charge of currency manipulation.

Mr. Trump is lying low, no doubt licking the wounds inflicted by the guilty verdicts announced for two of his former closest allies. There is little doubt however he will “come out swinging” as the midterm elections approach.

Macron woes add to Eurozone political morass

It seems that the only way for the EU to avoid the continual political issues that seem to spring up almost daily is for it to move swiftly towards an even greater Federalization.

Germany, Spain, Italy, Greece, every corner of the region seems to have some issue with the latest threatening to engulf French President Emmanuel Macron who is, ironically, currently the loudest voice calling for greater integration.

Yesterday, M. Macron faced the humiliation of one of his Ministers and closest allies resigning from his position live on radio. Environment Minister Nicolas Hulot left the Cabinet accusing Macron of an “accumulation of disappointments” over green issues.

This follows charges that the supposedly centrist Government elected to unite a badly fractured country has lurched strongly to the right. There are accusations that the President is being swayed by the rich and powerful as well as big business.

Macron, who has survived two no-confidence motions and has been accused of being more interested in Brussels than Paris, an accusation also leveled at Angela Merkel, will test his popularity again in the coming weeks as he introduces reforms to what he sees as France’s over-generous state pension scheme.

The euro continues to be unaffected to any great degree by individual countries internal squabbles since its path has been set, almost in stone, by the ECB’s monetary policy decisions.

Yesterday, it rose to 1.1710 versus a weakening dollar but remains shy of strong resistance at 1.1740.