Sterling falls despite encouraging data

The manufacturing sector in the UK managed to maintain growth in June despite fears over the effect on the UK economy of its departure from the EU. Prior to the decision two years ago to leave, the UK economy was the strongest and fastest growing in the G7.

The slump in the value of the pound and the slowdown in the wider economy in reaction means that when Brexit is achieved, no matter what the final deal looks like, the UK will be far behind the rest of the world as it tries to catch up with a global economy that, despite concerns over trade, is starting to pick up pace.

This week Prime Minister Theresa May will hold a “Brexit Cabinet” at which it is hoped that the UK’s proposals for the future relationship can be finally agreed. There have been concerns voiced in several places, not least of all Brussels, that time is running out for a deal to be agreed.

Veiled comments from Michel Barnier the EU Chief Brexit Negotiator and Jean-Claude Juncker the President of the EU Commission appear to show that a decision over the Irish border is still far from agreed.

The pound fell to an eight-month low versus the dollar last week and has barely recovered. It reached a low of 1.3092 yesterday, recovering only slightly to close at 1.3143.

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Agreement over immigration covers cracks in German Coalition

Angela Merkel has headed off another threat to her leadership as she and her Interior Minister, Horst Seehofer, who is also the leader of Merkel’s main coalition partner, found a solution to their differences over immigration.

That is the theory of what happened yesterday.

There are still deep divisions in Germany over Mrs Merkel’s open-door policy that has allowed close to one million immigrants to settle in Germany since the crisis began.

The rise of nationalism which appeared to have waned following last year’s elections in France and The Netherlands was again seen in the German elections and it is feared that Seehofer’ s CSU may lose its majority in its home state of Bavaria if it softens its stance on allowing the open-door policy to continue.

The weakness of Merkel’s position at home will delay her support for greater integration within the EU as Germany, which casts a giant shadow over the entire region looks to pull back within its own borders.

The single currency remains within a broad 1.1723/1.1520 range versus the dollar as drivers wax and wane, although economic and political headwinds make further losses possible.

The euro strengthened versus the pound yesterday as the effect of Brexit continues to be considered a UK centric issue despite the effect of a possible hard Brexit, where the UK immediately withdraws contributions to the EU budget, on the region’s finances.

Dollar drifting as traders await employment data and trade announcement

The greenback fell on Friday following advances made by both the pound and euro although it has gained overnight as the news from Germany drove the euro lower.

With no fresh news to drive its direction, the dollar has entered a reactive phase as it awaits this week’s employment report to provide confirmation, or otherwise, of the Fed’s position on further interest rate hikes in 2018.

Yesterday’s release of manufacturing data showed that the pace of growth is starting to pick up with the June ISM Manufacturing PMI rising to 60.2 from 58.7 in May. This was against the backdrop of analyst’s expectation for a slight fall.

The expectation is for around 200k new jobs to have been created in June. This data remains strong despite the unemployment rate remaining constant at around 3.8% which is well below what is considered full employment. Wages growth is likely to have increased by 2.7%, unchanged from May, although there is potential for an upside surprise given the certainty of the FOMC over the path of inflation.

It is expected that the White House will announce measures curbing overseas investment in certain “strategic” industrial businesses as President Trump seeks to find a solution to the theft of U.S. firms intellectual property.

The dollar index, reflecting the range of the single currency remains becalmed between 95.25 and 94.50, rising to a high of 95.14 yesterday before closing at 94.86.