Sterling Completes Miserable Month

Economic slowdown fed by Brexit mess

It is difficult to imagine the progress of Brexit negotiations between the U.K. and EU being any worse than they have become. The third round of talks which started on Monday have been characterized by both sides complaining about lack of progress and revealing the vast gulf between them by blaming each other.

Michel Barnier, the EU’s Chief Negotiator has said that “the U.K. does not feel obligated to fulfil its legal commitment to pay the exit settlement”. This is the most vivid example of the lack of progress and the back-biting that is starting to characterize the talks.

Liam Fox, the U.K. Trade Minister in a speech overnight reinforced his hard-Brexit credentials by commenting that the U.K. must not allow itself to be blackmailed by the EU to pay more than it wishes to retain a trade relationship.

Barnier went on to say that no decisive progress had been made in the third round of talks, while the U.K. Brexit Minister called upon the EU to be more “imaginative and flexible”.

The frustration both sides clearly feel is shared by U.K. business anxious for clarity over just how Brexit will work. While the two sides bicker and “points score” investment is “falling off a cliff” dragging the economy and Sterling with it.

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Sterling “clinging on” as Euro takes a breather

The pound last month recorded its worst performance on a trade weighted basis since last October as the common currency continued its surge higher benefitting from a myriad of positive factors.

The pace of the rise of the Euro has, however, slowed a little this week as liquidity has returned to the market and the approach of critical resistance levels has brought about some profit taking on long positions from traders.

The pound came close to the 0.9330 level it reached during the flash crash late last year but there was little follow through as this coincided with the common currency also reaching the 1.2000 level versus the dollar. This level was most traders medium-term target
There was a rumour that the ECB were starting to be concerned over the strength of the Euro and this contributed to the slowdown in its progress.

The Central Bank are generally extremely considered in their approach to the markets. They will have been fully briefed in the expectations created by their policies so it is unlikely that they have now suddenly become alarmed at the rise in the currency. Mario Draghi, when presented last week with two opportunities to comment on the strength of the Euro studiously avoided the subject.

Mnuchin talks the dollar down

In stark contrast to the ECB, U.S. Treasury Secretary Steve Mnuchin blatantly attempted to “talk the dollar lower” yesterday saying that a “lower dollar was probably good for U.S. trade”. Whilst that is stating the obvious it is the first time that an official has backed up the President’s assertion that the rest of the world has been taking advantage of their own currency weakness at the expense of the dollar.

The dollar which had been showing resilience against its major trading partners fell back aided by weaker than expected economic data which brought attention to today’s employment report.

Data released by the EU showed that inflation in the Eurozone crept up in August which came as a surprise given the strength of the currency and adds to speculation about how fast the economy is starting to grow.

Canada, following last month’s rate hike, released growth data which was appreciably stronger than expectation. The Canadian economy grew at 4.5% in Q2 compared with a year before. This added to speculation that the Bank of Canada could hike rates again when they meet next week.