UK Headwinds turn Storm Force

Rebels at the Gate

Just about the only plank of support the pound was receiving was unceremoniously removed over the weekend as open rebellion to the leadership of Prime Minister Theresa May erupted. Two of her most senior Cabinet Ministers; Boris Johnson and Michael Gove have restated their Hard Brexit credentials and openly criticized the Chancellor Philip Hammond for being unprepared for a “no deal” scenario.

If this wasn’t enough for a beleaguered leader, the backbench rebellion from MP’s who want Mrs May to face a leadership challenge has no reached forty, just eight short of the number required to force a vote.

The pound has opened the week lower in Asian trade, so far reaching lows of 1.3107 and 1.1250 versus the dollar and euro respectively, having closed on Friday at 1.3230 and 1.1313

Johnson and Gove are two of the most divisive members of the Government, seen as either the champions of Brexit or disloyal and uncontrollable with their own leadership agenda.

This story will dominate the early part of the week, particularly since the Brexit withdrawal legislation faces a long and arduous debate in the House of Commons tomorrow with the opposition Labour Party set to join Government rebels in voting for several changes.

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EU gets tough as Stage Two set for delay until March

If proof were needed that the ambiguous rhetoric of EU Leaders following the recent Brussels Summit was merely to provide a little breathing space it came at last week’s fifth round of Brexit talks. Michel Barnier commented that he is preparing for the total collapse of negotiations as the U.K. is not prepared to provide the necessary proposals on the three main points of contention that the EU demanded at the start of the talks.

The words of Theresa May when she promised that the EU had nothing to fear over the Budget and the U.K. would pay “every cent” it is legally due to pay, sound hollow now as David Davis continues to prevaricate at every turn bringing anger and frustration. There has been no discernible progress in talks which leave British businesses even further (if that were possible) in the dark over what they can expect once the U.K leaves the EU.

Brexit minister Davis said on Sunday that Britain will not offer another figure or a formula for how much it believes it owes the European Union, despite having offered to pay sixty billion Euros. This is not enough for Barnier and Brussels and despite the spotlight having always been on any offer coming from the U.K., the EU is going to have to “come up with” its own offer on how much it expects before the two sides can really negotiate and move forward.

Inflation releases to confirm G7 monetary policy

The third week of the month is generally labelled “U.K. week” as it is the “big week” for U.K. data with inflation, retail sales and employment data all due for release.

The degree of expectation generated for this week’s data has been a little deflated following the MPC meeting at the start of the month where BoE Governor Carney basically gave advance guidance that inflation would exceed 3%, the gap between prices and wages would widen, unemployment would remain at record lows and the consumer was in danger of withdrawing support for the economy.

Traders have already positioned themselves for these outcomes and it would be a major surprise if Carney’s predictions were anything other than accurate. It is hard to see where there could be any surprise, other than the possibility that retail sales could be even weaker, given that retailers have already started to discount prices to ward off concerns that some shops have already seen a 5% fall in sales from the same period in 2016.

Inflation is a concern in both the U.S. and Eurozone too. In the U.S., it is the lack of inflation that is causing concern to the FOMC which is keen to embark on a normalization of monetary policy. In the Eurozone, the ECB has signalled that unless regionwide inflation starts to increase dramatically it is set to leave rates unchanged for the foreseeable future.

This week’s events of note

It’s U.K. Week! The thirds week of teh month brings a slew of U.K. data, although this month has been a little preempted by advance guidance from the Bank of England.