Prime Minister May offers nothing new on Brexit

Theresa May made her keynote speech to the Conservative Party Conference yesterday and while she exuded confidence over the prospects for the UK economy post-Brexit, she offered nothing new to allay the concerns over her “Chequers Proposals”.

Her performance was well received, and she remains a popular leader, seen as someone who “sticks to her guns” by the rank and file of the Party.

Brexit remains the only issue that is driving Sterling as the countdown towards the UK’s departure from the EU approaches and while there were no new proposals for Brussels, the UK’s position remains unchanged and unflinching.

There are some tough negotiations to come in the next few weeks, but Mrs. May will be pleased to have left Birmingham without a serious challenge to her leadership.

She and her Brexit Minister will now seek, through negotiation, to clear the logjam that has developed over, in particular, the Irish border issue. There was a call from the Czech Foreign Minister yesterday for the negotiations to be split between agreeing to the “divorce” terms, then agreeing to a trade deal. This idea may form the basis for the next discussions, but time is still running out.

The pound staggered a little in the face of renewed dollar strength but remains well supported versus the single currency. It reached a low of 1.2924 versus the dollar, closing at 1.2940 while it rallied to 1.1286, closing at 1.1273 versus the single currency.

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Euro falls in face of a stronger dollar

The single currency rallied initially yesterday following news that the Italian Cabinet had agreed to reduce its budget deficit in three years, provided this year’s level of 2.4% of GDP was accepted. While this offer doesn’t solve the burgeoning debt to GDP ratio, it does show the Italian Government is prepared to discuss its proposals despite remaining committed to its election pledges.

Later in the day, the euro fell as the dollar exerted pressure. It reached a low of 1.1464 as the prospect of a rally through 1.1820 resistance that was being discussed last week now seems to be a distant memory.

The pace of the fall is unlikely to ruffle any feathers at the ECB yet. While it could be inflationary, if it continues at this pace for any length of time, with prices in the Eurozone well controlled, it will be more of a help to exporters than a hindrance to price stability.

The announcement that Italy will reduce its budget deficit from 2021 calmed the market a little but inflammatory words from Five Star’s leader Luigi Di Maio, pledging to “not backtrack by a millimetre” kept up the pressure on Brussels. The Economy Minister had already pledged that the budget deficit would be reduced to 2.2% in 2020 and 2% in 2021.

This “jam tomorrow” pledge may be enough to placate the more hawkish members of the EU Council but until Rome commits to greater fiscal responsibility the problem will remain.

Dollar forges ahead

It is difficult to fathom whether the Trump Administration has a dollar policy anymore.

Back in February, there was a seeming disagreement between the President and the Treasury Secretary about whether a strong or weak dollar was in America’s interests.

The President contradicted Steven Mnuchin who said a weaker dollar was in the interests of U.S. exporters while Trump was more macho in his assessment calling for a stronger dollar without any real economic reason.

Since then the dollar has fallen back a little then rallied again strongly making a high of 96.99 and now looks set to test that level again.

Jerome Powell, the Chairman of the Federal Reserve, has ignored Trump’s displeasure over the path of interest rates to hike twice more with another to come in December.

Yesterday, Powell reiterated his promise to continue to hike rates above an estimated “neutral setting” in response to what he called the remarkably positive economy.

Data released yesterday for private sector growth showed its biggest increase since February, adding 230,000 new jobs. While there is no correlation between the private sector jobs and the NFP this has produced some optimism about tomorrow’s employment report.

The estimate remains at 188,000 new jobs but there is a growing expectation that may be on the low side.

The dollar index reached a high of 96.13 yesterday, its highest level since mid-August and has remained well supported overnight.