Pounds attempts to shake off Brexit worries

Yesterday, traders concentrated on what they could see, rather than what they could hear, as Sterling continued to show strength following Friday’s better than expected manufacturing data.

However, the effect of the weak pound, while good for exporters, will start to weigh heavily on input costs. Todays release of factory prices are expected to show an increase in excess of 15% on a non seasonally adjusted basis. This will be seen as a direct result of the fall in the pound following the Brexit referendum.

This will, in turn, sharpen traders focus with the release of inflation data and retail sales later in the week. Inflation is expected to rise to 1.9% in January. Still short of the Government’s target of 2% but the total effect of Sterling’s fall is yet to be fully realised.

Retail sales, being a lagging indicator, should still show healthy growth as the retailers will not, as yet, have priced in the additional costs seen since last June, having hedged their exposure a season ahead.

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Debt and Political Headwinds Drag Euro Lower

The IMF intervened over the rising concern that is being felt in the Eurozone over the ability of Greece to service its mounting debt. Again.

Christine Lagarde, no stranger to controversy herself, weighed into the conversation commenting to Reuters that “the IMF would do its best to agree on a bailout but could not compromise its principles”. In other words, if Germany want to play hard ball they’re unlikely to stand in their way.

A collision is likely since Greece has already stated that it will not take on any greater debt burden and the EU (Germany) has refused any debt writedown unless the Greeks complete previously agreed plans to sell off publicly owned assets. German Finance Minister Gerhard Schaeuble has gone a step further, saying that if it is unable to fulfill its obligations it must leave the Euro. Mrs. Merkel must have searched high and low to find such an empathetic Minister!

Politics is causing major concerns for the EU Council with fears growing of populism and nationalism playing a significant part in both Dutch and French elections. The Council meets later in the week and politics and Brexit will top the agenda.

EU Winter Growth report Paints Rosy Growth outlook

In its winter forecast released yesterday, the EU painted a (relatively) bullish picture for growth through the remainder of 2017 and into 2018. Growth expectations for 2017 have been raised from 1.5% to 1.6% and for 2017 from 1.7% to 1.8% in 2018. Hardly earth shattering but at least they are moving in the right direction.

A cynic may argue that following the recent Quarterly Inflation Report issued by the U.K., in which a particularly optimistic view of the economy was painted, a call was made to Brussels to ensure that the Eurozone would at least post reasonable growth numbers. There is a clear difference of opinion between the EU and UK over UK growth expectations – possibly a marking of prospective bargaining positions for when the Brexit negotiations start.

Inflation is also likely to pick up in the Eurozone over the next two years. The difficulty facing the European Central bank will be what policy tools they can use to control it. The ECB’s definition of price stability makes clear that the focus of its monetary policy is on the euro area as a whole. This reflects its euro area-wide mandate. Therefore, price stability is assessed on the basis of price developments in the euro area economy.

Germany is likely to see appreciably higher growth than the other Eurozone members and consequently higher inflation. The Bundesbank has commented that it does not wish to see a weaker Euro but weakness is only exacerbated when monetary policies are clearly as out of line as they are between the Eurozone and U.S.