Sterling Rallies as Debate Looms

Davis Assures Parliament over Brexit progress

The return of Parliament after its summer recess has marked the start of the Brexit process in earnest. David Davis, The Brexit Minister, updated MP’s on progress assuring them that, despite the difficulties being experienced by both sides, advances have been made. His comments were met by derision from the opposition who have already decided that they will vote against the repeal bill when it is put before them on Thursday.

The “divorce bill” remains the single most contentious issue remaining to be discussed although Davis was at pains to confirm to Parliament that the U.K. is being far more flexible and pragmatic than their EU counterparts.

Sterling has rallied above 1.3000 against the dollar as optimism that the Government will win the vote over the repeal bill gains strength. The return of Parliament has brought back some realism as speculation throughout the summer was doom laden and congtributed to the huge selloff in Sterling.

Theresa May was in Japan earlier in the week assuring Prime Minister Abe of the U.K.’s support over the North Korean crisis but also garnering support for a post-Brexit trade deal as well as the continued presence of Japanese car manufacturers in England following the U.K.’s departure from the EU.

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Economic data confirms slowing economy

Purchasing Managers indexes (PMIs) of economic activity provide a useful forward-looking view of the economy since they look at what is happening at the factory gate.

Yesterday’s release of both manufacturing and services PMI told a contrasting story but both revealed a looming slowdown in economic activity.

Manufacturing is currently benefitting from a weak pound driving trading activity, with Europe in particular as the weak pound makes British goods attractive. This seems to be the lull before the storm as the departure from the single market is a real concern on both sides of the Channel.

However, services data told a different story reporting its weakest number for a year and falling well below analysts’ expectations. A PMI above 50 shows expansion in the economy and the further above 50 the greater the expansion. A read below 50 signals contraction and is a signal of coming recession. Yesterday’s Services PMI was 53.2, a fall from the July reading of 53.8. Services make up 60% of the economy so any further falls will bring concern to the Bank of England which meets next week.

Sterling has fallen 13% against the dollar and 17% versus the common currency since the Brexit referendum yet the benefit to exporters is being eroded by higher import costs for raw materials.

Central Bank meetings to highlight contrasting fortunes

The European Central Bank meets tomorrow to discuss monetary policy and the Bank of England meets next week. The atmosphere at the meetings could not contrast more. Both Central Banks will most likely leave rates on hold but they will be reacting to totally different economic outlooks.

The Eurozone is exhibiting political stability despite murmurings of discontent in the east and economic activity is starting to stabilize across the whole region. Contrast this with the U.K. which is riven with doubts over Brexit, an economy which is faltering and political disarray.

The ECB, which meets today and tomorrow, has turned extremely dovish preferring to be cautious and ensure any change in monetary policy suits the region as a whole. German concerns over imported inflation have gone away although the strength of the Euro may lead to a slowdown in export activity.

There had been speculation about the tapering of the Asset Purchase Scheme but that is now likely to be deferred until next month’s meeting as Mario Draghi, the ECB President sees no reason to make changes yet.

Despite one continued hawkish voice, the Bank of England will be more concerned about how to stimulate economic activity than continued and rising inflation. With interest rates at historic lows and the economic stimulus package still in place, Governor Mark Carney’s hands are tied until some clarity over Brexit brings some relief.