Election “ill-wind” to encourage Brexit agreement?

The pound got a “shot in the arm” on Friday from the most unlikely source. Despite the results of local elections in England being the most predictable in years, the fact that both major parties did poorly has spurred the idea that the time has come for them to put aside political sparring and find a way to agree on a way forward on Brexit.

An attempt to galvanize support for Sterling from BoE Governor Mark Carney fell on “stony ground”, proving that it is only Brexit that can currently drive the markets view on the pound.

This week sees the release of Q1 GDP data for the UK and the view of the market is that it will be unchanged from Q4 ‘18 at 1.4% YoY with the economy remaining in positive territory QoQ with a rise of 0.2%. As with both the U.S. and Eurozone data, there is optimism for a slightly stronger figure and this has added to support for the currency since, despite the ongoing Brexit stalemate, the economy has performed a little above expectation.

The pound reached a high of 1.3178 on Friday, closing just two pips from the top. It has corrected a little this morning in Asia, reaching a low of 1.3117.

Comment from senior Opposition MPs on TV at the weekend has, however, hardly been conducive to expectation for a Brexit Breakthrough this week. Shadow Finance Minister John McDonnell commented that the Labour Party cannot trust the Prime Minister since she is using cross-Party talks to further her own agenda.

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U.S./China trade talks coming to a head

In a typical piece of Donald Trump gunboat diplomacy, the President fired a shot across the bows of China over the weekend by tweeting his intention to raise the tariff on a range of Chinese imports into the U.S. from 10% to 25%.

Risk appetite has plummeted in Asia overnight with the Chinese stock market taking the brunt. Trump went on to say that he is considering cancelling this week’s round of talks as the market begins to consider that after so many “false dawns”, the situation is starting to look a little like Brexit; an issue with no solution.
Friday saw the release of the April employment report in the U.S. This was appreciably stronger than the market had expected. However, in a typically obtuse reaction, the dollar failed to rally significantly and, in fact, ended the day lower, reflecting the market’s uncertainty over future Fed actions.

The headline rise in NFP of 263K, which comfortably beat market expectation, was backed up by a fall in the unemployment rate to its lowest since 1969. While charges of massaging the data cannot be aimed at the U.S. Employment Department, as they often are in the U.K., the volatile nature of this data will need verification next month.

The dollar index corrected its current rise although it remained entrenched in its recent higher range. It reached a low of 97.45, closing at that level. It has barely changed overnight following the President’s social media activity, trading between 97.59 and 97.49.

There will probably be further comment on trade this week although it is unlikely that China will respond to Trump’s comments, preferring to wait for deeds rather than words.

This week’s producer price data is expected to have ticked up a little in April which may bring a little support for the dollar as future inflation is clearly on the Fed’s radar.

Is Draghi set to be proven right again?

Throughout a dark economic winter for the Eurozone, ECB President Mario Draghi has been resolute that the downturn in economic activity is a reaction to the global economy.

The words of Donald Trump over the weekend may have prolonged that view a little but it is the increase in Eurozone inflation that could yet push Draghi’s stock higher since he predicted that price increases would be the first indicator of the “green shoots” of recovery.

Month on month, inflation rose from 0.8% to 1.2% in April adding to a YoY rise to 1.7%. Whilst hidden amongst several other factors, this could be the most significant data released this quarter if it is repeated in May. The long recovery of the Eurozone economy may have started although the market will be keen to see more evidence before it starts to close short positions in the single currency.

While Q1 GDP also beat expectations some of the more forward-looking sentiment and activity indexes are still lagging behind a little, so there is still a considerable amount of work to be done.

With Draghi leaving his position in six months time, there is about to be a significant change, not just in personnel, but in direction for the ECB. Draghi will be entitled to several accolades when he does leave his post but will undoubtedly be remembered for never having been able to raise interest rates. It is highly unlikely that he will be in a position to “break his duck” in the coming months.

The single currency reached a high of 1.1206 on Friday, closing at 1.1201. It has remained supported this morning in Asia but any escalation from either Trump or China may be something of a negative.