Germany denies softening Brexit stance

When I saw the pound rallying yesterday, I went in search of a valid reason. All I found was the entirely spurious (I felt) rumour that the UK and Germany had agreed to set aside some of the differences between them over Brexit and that would smooth the path for a soft departure.

First, the “differences” were impossible to define. Second, I found it hard to imagine that Germany had any “specific” differences. Third, even if they did, any discussion and agreement would be met with a fanfare, not a rumour.

Of course, later in the day, in a classic buy the rumour, sell the fact move, the market corrected as the Germans denied any change in their position.

It is unlikely that this will be the last such rumour to hit the street and it will become increasingly difficult to “sort the wheat from the chaff”.

A survey released by Reuters yesterday portrayed what I see as an unusual degree of optimism over Brexit and its effect on Sterling. It would appear that several analysts still believe a deal will be done and are using that as their base case. While I would agree that a deal is still possible it is more in the balance than this survey suggests.

The pound reached a high versus the dollar of 1.2984 and a low of 1.2785 on a volatile day, closing at 1.2854. It was a similar story versus the euro, making a high of 1.1165 and a low of 1.1049 and closing just five pips below the opening level at 1.1099.

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Focus shifts from trade as data releases take centre stage

As trade disputes continue to be the phoniest of phony wars, the U.S economy will take over the spotlight, at least temporarily, as the August employment report is due for release tomorrow, preceded today by the ADP private sector report and several activity indexes.

While the ADP report is decoupled from the NFP data (mainly because ADP uses actual data while NFP is made up of a lot of estimates), it remains a useful indicator. It is expected that today’s data will be a little weaker at +190k following last month’s +219k.
Services activity is expected to have risen to close to 56 from last month’s 55.2. A sub-50 read denotes a contraction in the sector, so services clearly remain buoyant. Factory orders likely fell by 0.6% MoM from a rise of 0.7% in July. This should be reversed next month as activity picks up after Labor Day.

This is merely the “hors-d’oeuvre” to tomorrow’s main course. The NFP is expected to improve somewhat from last month’s +157k. However, if the revision (there is always a revision) is minor then the dollar may see a correction. Wage inflation is unlikely to have changed for the fourth month in a row, but should there be a change, it is likely to be from 2.7% to 2.8%.

Yesterday, the dollar index closed lower at 95.14 having made a low of 95.07.

Euro rallies provide selling opportunities

Any pretension that the ECB have held about the euro replacing the greenback as the global reserve currency before the Yuan inevitably takes over are fading rapidly as a mix of insipid monetary policy and benign neglect create a currency that is both inherently weak and almost entirely reactive.

Whilst any global ambitions are fading the relative stability of the single currency is a boon to Eurozone manufacturing and industrial production.

However, it is politics that provides the wind in the euro’s sails. It seems there are very few positive political outcomes to see the euro higher, versus the dollar in particular, as issues in Italy, Spain, Germany, and several Eastern Eurozone members continue to bring concern.

The Austrian Foreign Minister was speaking of Brexit recently. She said that the remaining 27 EU members disagree on just about everything, but the only thing they speak with a single voice about is the UK’s departure.

It is hard to imagine any short-term driver that is going to push the euro higher, so, for now, it remains in a broad 1.1780/1.1480 range versus the dollar. Yesterday, it reached a high of 1.1625 and traded up to 1.1660 briefly overnight but ran into selling pressure which pushed it back to yesterday’s closing level.