UK on the Cusp?

Are we being flattered only to be deceived? Is there really a viable deal on the table to end the constant back and forth over the departure of the UK from the European Union?

Given that the FX market, unusually turning more slowly than a supertanker, has now become far more sceptical about a deal and therefore not being in such a hurry to buy Sterling, that would be quite ironic.

Yesterday, there were no fresh rumours other than some confusion as to whether Brexit Minister Dominic Raab was travelling to Brussels or not (yes, it has come to that), on which appeared to hinge the possibility of an announcement over deal long-awaited deal.

Downing Street refused to confirm or deny Raab’s whereabouts, but it has been confirmed that he will address Parliament on the “state of play” later today, in what could be the first official comment on the rumours that have been swirling around for nearly a week.

The pound had a volatile day, rallying just ten pips from its open before falling to a low of 1.3028 and closing at 1.3089. Versus the euro it paused for breath after three days of fresh highs. It reached 1.1399 closing only marginally lower at 1.1394.

Overnight, like-for-like retail sales data for September was released. This was weaker than expected falling by 0.2% after a 0.2% rally in August.

Ben Broadbent, the Deputy Governor of the Bank of England speaks later and with a slew of economic data due tomorrow, unless there is a definitive announcement on Brexit, the markets gaze may be directed back to the economy for the next 36 hours.

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Italy spoiling for a fight

Brussels is being given a salutary lesson in what to expect from a populist Governments in years to come as Rome continues its solo quest to reassert its authority over its economy and social policies. Brussels will soon have to start to remind Rome of its responsibilities and the treaties and agreements that were signed by the present administration’s predecessor.
While there are conciliatory noises being made by the economy minister over the scaling back of the budget, the Cabinet, in particular the Prime Minister is in no mood for compromise.

Matteo Salvini yesterday accused the EU’s leaders as being the enemy of Europe. Brussels has in turn accused Rome of creating a budget that will deliberately flout the spending rules that have been put in place to ensure financial stability. Italy’s budget plans will have been vetted by Brussels by mid-October, and with further criticism likely, a confrontation, which can only harm the single currency looks a certainty.

Borrowing costs have reached a four-year high and Sr. Silvani also rounded on “financial speculators” accusing the market of seeking a failure, something he clearly feels he can manage alone.

The single currency resumed its fall yesterday, reaching a low of 1.1458 against the dollar, although it managed to move a little higher late in the day, closing at 1.1491.

This week’s ECB meeting is unlikely to bring any surprises, but Sr. Draghi may make a reference to the inflationary effect of a weaker currency which could add some support.

Dollar rally in danger of stalling

The dollar index has run into resistance around the 96.00 level as it has reacted to the issues facing other currencies following the mixed employment report that was released on Friday. While the Fed continues to promote the underlying strength of the economy, it will take more than anecdotal evidence for the rally to be sustained.

It is likely that the dollar will enter a more subdued state during the second half of the month with traders reluctant to take positions ahead of the midterm elections which will be held on November 6th. There is a great deal of speculation about the outcome but whatever the result, given the present incumbent, there is bound to be a reaction.

Until then, the economy will feature heavily with inflation data due on Thursday, preceded by producer prices tomorrow. Next week sees the release of retail sales data, the core consumption inflation report (the measure favoured by the FOMC) and the minutes of the latest Fed meeting.

China will release its trade data on Friday and this may draw a reaction for President Trump, with the subsequent threat of an escalation of the trade dispute that continues to rumble on. Market expectation is for the surplus to shrink considerably in dollar terms following a significant weakening of the Chinese currency. However, in like for like terms, priced in Yuan the surplus continues to grow.