Sterling remains driven by Brexit rumours

For the second time in a week, Michel Barnier, the EU Chief Brexit Negotiator sent Sterling higher with a comment about his “hopes” for Brexit. Unless there is a positive follow through and his call for “realism” from negotiators is heeded, this may be yet another false dawn.

It has often been the case in negotiations that Barnier’s calls for realism have been a metaphor for capitulation and despite the furore building at home, Theresa May appears to remain committed to the Chequers proposals.

The Conservative Party Conference starts on Sept 30 and Mrs May faces a tough time, with as many as eighty of her Party’s Members of Parliament planning to rebel against the proposals. It may be that she is left with a stark choice; give up on Chequers or lose the leadership.

Whatever she decides cannot be positive for Sterling.

Going back to the drawing board over the future relationship would almost certainly bring a hard Brexit closer, while a leadership contest would inevitably involve former Foreign Secretary, Boris Johnson who would fight a campaign with a no deal Brexit as its main plank.

The pound rallied versus the dollar to its highest level since early August, reaching 1.3052 and closing at 1.3026. Versus the euro, it rallied to 1.1242, closing close to that level.

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Euro’s lack of drivers leads to narrow range

The single currency continues to “drift in the wind, driven by dovish monetary policy and reactive to the convulsions of the dollar.

It is a characteristic of the market in recent times that it has become reliant on a single factor to drive a currency in a binary fashion. That has been true of Sterling with Brexit and it is also valid for the euro. It seems that no matter the macroeconomic or political events that should have a short-term effect, the lack of movement in monetary policy creates a bearish overhang.

This week’s ECB meeting is unlikely to change the overall picture and Mario Draghi is most likely to remain dovish possibly even reiterating his view that if the signs of a weakening economy remain, the gradual withdrawal of the Asset Purchase Scheme will be postponed or reduced.

The euro remains in a wide 1.1480/1.1780 range versus the dollar and no matter the drivers for the greenback, it will take a euro centric event to push it outside that range which is well defended on both sides.

Yesterday it reached 1.1614 before falling back to close at 1.1553 and looks likely to trade an even narrower range before Thursday’s meeting.

Dollar remains reactive to trade news

The recent path of the dollar has mostly been determined by the trade disputes between the U.S and China and to a lesser extent the breakup of NAFTA. An agreement has been reached on a new deal with Mexico while Canada continues to baulk at what is proposed by Washington.

Further pressure was placed on Canada yesterday as Mexico confirmed that it is prepared to agree a bilateral treaty with the U.S. which would push Canada into either signing what is proposed or having no trade deal with either the U.S. or Mexico. While their trade with Mexico is insignificant when compared to the U.S. being part of a group which can negotiate more favourable terms globally is a major benefit.

President Trump is unlikely to ease the pressure at all given the antipathy that exists between him and Canadian Prime Minister Trudeau.

The threat of further tariffs on imports of Chinese goods into the U.S. remains and if Trump announces fresh measure they will be met by retaliation by Beijing which may start to include other measures than simply tit for tat additional tariffs, as China’s imports from the U.S are dwarfed by its exports.

This may lead to an escalation, and while bad for the U.S. economy, would drive the dollar higher as it would lead to safe haven buying to the further detriment of emerging market currencies.

The dollar index gave back some of its recent gains yesterday, making a low of 95.03 and closing at 95.16 as it pivots around the 95.15 level.