Support for Sterling Continues to Fade

Data to confirm Carney’s fears

Bank of England Governor Mark Carney in his press conference following last week’s MPC meeting all but confirmed that inflation would continue its upward trend when the data for October is released next week. Traders focus tends to switch to Sterling in the third week of the month as data for inflation and employment are released.

The gap between incomes and prices will widen further as inflation reaches 3.2% and wage growth remains benign. The British economy is facing a difficult period as traditional supports disappear to be replaced by headwinds from almost every direction.

Over the course of this week the pound has consolidated at lower levels without ever looking like recovering the ground lost following the “dovish hike”. Support versus the dollar remains at just above the pivotal 1.3000 level. However, a close today below 1.3100 would be produce a bearish signal for traders since it would be the first time since April that the it has closed a week below its 21-week moving average.

Retail sales data for October will also be released next week. Following the fall in like for like sales by 1% a similar fall will be a signal that the consumer is starting to struggle just as the most important period of the year for retailers begins.

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Brexit Talks “going through the motions”

The lack of comment following the first day of round five of Brexit talks has confirmed that there has been no progress in the move towards the start of stage two of the talks at the next meeting. Given the rather ambiguous comments of EU Council President Tusk following the recent summit it was never going to be straightforward if there were no concessions from the U.K. The air of optimism was “nice while it lasted” but it has evaporated as soon as reality set in.

Versus the single currency, Sterling has recovered a little as monetary policy issues dog the Euro. In fact, unless there is a dramatic shift in Brexit talks today, it is likely that the weekly close will be very similar to every weekly close for the past month.

The nature of monetary policy in the Eurozone is still taking shape as it is still in a relatively experimental state since it is still less than twenty years old.

The face of the ECB, the President, started as a compromise with the appointment of a Dutchman; Wim Duisenberg. It then moved to a Frenchman with the appointment of Jean-Claude Trichet and on to Mario Draghi the current incumbent. The past two appointments have been labelled “anyone but a German” but that mantra is likely to be destroyed with the likely appointment of the hawkish Bundesbank President Jens Weidmann in late 2019.

May struggling to manage her team.

The combination of backbench rebels and incredibly naive Cabinet members is proving a very difficult mixture for the U.K. Prime Minister to manage. The outspoken Brexit hawks in her team cannot bring themselves to “tow the party line” with the likes of Boris Johnson and Liam Fox only too willing to exhibit their hard Brexit credentials.

The recently departed Priti Patel was another Brexiteer who will now add her weight to the backbench rebels who will make the passing of the Brexit Bill through Parliament as difficult as possible.

The fact that Theresa May is still Prime Minister will surprise some. The only headwind the pound isn’t currently facing is the possibility of a change of Prime Minister or a General Election. However, given the fragility of a minority Government that could change very quickly. It must be said that May’s position is stronger than that of her Government since the role of Prime Minister is considered, in light of current events, to be something of a poisoned chalice.

Having to balance remain versus leave voices in her Cabinet has proven difficult as ministerial positions haven’t always been granted based on talent but more on the candidates Brexit views.