Trump stirs the Brexit pot

Those in favour of the UK’s departure from the European Union were given a stark reminder of the UK’s position post-Brexit over the weekend. President Trump, who arrives in the UK today, confirmed that the UK will be treated “fairly” in negotiations over a trade deal but will have to “play ball” in other areas, in particular security.

Trump’s typically heavy-handed approach led to two of the contenders for the Conservative Party leadership potentially U-turning in the commitment to a deal with Huawei for the UK’s 5G network.

Boris Johnson and Nigel Farage received Trump’s endorsement as Conservative Leader and Chief Brexit Negotiator respectively.

The pound remains in limbo ahead of Theresa May’s departure reacting positively on Friday to a weaker dollar. However, the more the candidates for Prime Minister use terms like “prepare for a no deal Brexit” and “no deal remains firmly on the table”, the more current support will be eroded.

As the campaign gets going and the “real” contenders emerge, the more volatile the currency will become. Once the “pack” has been reduced to two, their Brexit plans will be more under the microscope as their fate is decided by the rank and file membership of the Party.

Sterling rallied to a high of 1.2646 on Friday closing at 1.2636. It had earlier traded as low as 1.2559.

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Germany’s coalition in danger as Green’s results “demand” a seat

Angela Merkel, the German Chancellor, will depart from that role in 2021 despite having already given up her role as Leader of the Christian Democrats. Her party’s position has been undermined by the resignation of the leader of its junior partner, the Social Democrats. The resignation of Andrea Nahles comes after the SDP fell to third place in the recent EU elections behind the Green Party.

Analysts believe that there could be a snap election following Nahles’ departure, despite the Federal Government being in place until 2021, coinciding with Mrs Merkel’s departure.

The identity of Nahles’ successor may trigger an election as the SDP could easily decide to leave the coalition in order to repair the damage done to its credibility by polling just 12% in the EU elections.

The Euro remains on the back-foot as political issues spread and the electorate’s demands for more balanced policies without stark choices come to the fore.

This week the release of inflation and GDP data together with an ECB meeting will provide further insight into the economy of the Eurozone as a whole. Inflation is expected to have fallen again, despite the weakness of the currency, reaching 1.30% from 1.70%.

Inflation, coupled with a fall in QoQ GDP from 0.4% to 0.2%, will provide the ECB with plenty to talk about on Thursday. Mario Draghi, the President of the Central Bank, is unlikely to depart from his continued assurance that higher wages will contribute to a turnaround in inflation in the coming months.

The euro remains close to its low for the year versus the dollar reaching 1.1183 on Friday and closing at 1.1171.

Busy week for the U.S. economy

While President Trump is in the UK this week, the outlook for the U.S. economy will be back in focus.

Manufacturing PMI is released, Fed Chairman Jerome Powell makes a speech, and the week concludes with the May employment report.

PMI reports, for some reason, carry less weight in the U.S. than they do in several other G7 nations. However, the market is beginning to come to terms with the report on activity and its correlation with other more “traditional” drivers like durable goods orders and regional Fed surveys.

Manufacturing PMI will be released later today and is expected to have risen from 52.8 to 53.3 providing some support for the dollar and adding another piece to the “Fed jigsaw”. Tomorrow evening Jerome Powell, the Chairman of the Federal Reserve, is scheduled to speak. He is unlikely to change the tone of the recent rhetoric on either the state of the economy or the future path of short-term interest rates.

Finally, on Friday, the long wait will be over, and the May report on non-farm payrolls will be released. April’s stellar number is expected to be revised lower and the expectation for May is (as usual) around +185k new jobs being created. These are the “standard” market views and while it is entirely probable that the April figure will be revised, should the May figure be above +200k, traders will see the future for the economy as brighter than they have for a few months and the Fed’s current tauper will be seen as a pause rather than anything more sinister.

On Friday, the dollar index corrected to a low of 97.72, closing at 97.76.