Compromises prove too much for David and Johnson

When things appear too good to be true, they generally are!

The announcement last Friday that UK Prime Minister May had managed to obtain unanimous support for proposals for the future relationship between Britain and the EU certainly seemed too good to be true. A “supersoft” Brexit had seemed a genuine possibility as the UK had announced that it hoped to be able to remain a part of the single market despite the plans appearing to be little more than a fudge.

Over the weekend Brexit Minister David Davis resigned citing compromises that the UK was making as his reason. Yesterday he was followed by Foreign Secretary Boris Johnson, who also resigned. In his resignation letter, Johnson told May that the original purpose of Brexit: the UK taking back its democracy, will be lost if the UK accepts a “semi-Brexit” where large parts of the economy are locked into the EU system with no UK control.

May continues to be defiant, clinging to the now discredited agreement reached last Friday, and now has the added problem of two heavyweight opponents lurking to pounce on any sign of weakness.

The irony of this situation is that Brussels has yet to decide on the plans that have been put forward, but while M. Barnier may well be happy to see the back of Davis and Johnson, a rejection of the terms will have more effect than the two resignations.

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Return of No Deal hits pound

Despite the “Chequers Agreement” bringing political upheaval to the UK, traders had seen the benefit to the pound of what appeared to be a soft Brexit and it had initially risen to its highest level in two weeks, reaching 1.3363 versus the dollar.

It is hard to decide whether the resignation of two senior ministers or the prospect of either no-deal or a hard Brexit was the catalyst for it to fall back to a low of 1.3189 before closing at 1.3260.

Political analysts believe that while the Prime Minister has been wounded by the departures from her Cabinet, her wounds do not, for now at least, appear fatal.

The delicate link between politics and the economy is such that should this turmoil continue and a leadership contest in the ruling Conservative Party or even a General Election become more than a possibility, then that will almost certainly preclude the Bank of England from raising rates, as the market expects, at its meeting on August 2.

The effect of both political and economic headwinds on the currency will precipitate a fall not dissimilar to the original “Brexit collapse” as the market abandons the pound. Just where such a fall would end is anyone’s guess and the economic effect will set the country back as business investment falls further, inflation rises with the Bank of England stymied, and growth falls towards recession levels.

Dollar and Euro take a back seat

The dollar remains under pressure as the most recent words of Fed. Chairman Jerome Powell are dissected to see if he has any “wiggle-room” in his assertion following the last FOMC meeting that he would place the two-further hike strategy on hold. Disappointment that wage inflation didn’t rise in June has hit the dollar although if the Fed plans to ensure rates return to normal sooner rather than later it should recover.

The political headwinds that faced the single currency in the past few weeks have receded for now as most Europeans plan for their August vacations. The euro remains in a relatively narrow range between 1.1850 and 1.1520 although the major trend is for further weakness.

While the U.S. and China continue to “ramp up” their trade war it is accepted by the market that eventually that will calm down, as both sides realize just how much they need each other.

However, the major battle is more likely to be fought at the corporate level, something that President Trump understands, as the U.S. “FAANGs” take on the Chinese BAT’s.

Facebook, Apple, Amazon, Netflix, and Google see their battle for supremacy with Baidu, Alibaba and Tencent being fought in emerging markets such as India and Brazil. While the FAANGs prefer to inflict their model on these countries, China is investing in start-ups there and in other similar countries then integrating the businesses with their own.

The two-fold nature of the trade dispute will see the reduction of the U.S’ deficit be proven futile while protection of intellectual property rights will assume a far more significant role.

The dollar index gained yesterday reaching 94.21, close to minor resistance, closing at 94.07. The euro, however, also gained initially, reaching 1.1791 before falling back to close virtually unchanged on the day at 1.1750.