More Brexit rumours “flood” UK press

Following a weekend where UK Prime Minister Theresa May’s position remained threatened from both Brexit wings of her party, the papers this morning continued the Brexit theme. Boris Johnson, the former Foreign Secretary, is keeping up his attack on the plans for the Irish Border contained in the Chequers proposals, calling them an effective annexation of Northern Ireland by Brussels.

These continued attacks by Johnson, clearly designed to keep the Prime Minister under pressure ahead of the upcoming Conservative Party Conference, are beginning to lose their effect and while they disagree with her proposals, the “Brexiteer wing” support May remaining as Prime Minister. May herself commented at the weekend that she finds the continued threats to her leadership “tedious” and believes her attackers would be better placed in trying to find solutions to the Brexit conundrum.

Michel Barnier the EU’s Brexit Negotiator has been one of the prime factors in driving Sterling over the past few weeks and he is rumoured to be giving Sterling another boost this morning as it is suggested that he is the author of a new protocol that will allow for a “frictionless” border between the north and south of Ireland which will smooth the path for a Brexit deal.

Sterling had a better week last week rising to a high of 1.3144 and closing at 1.3069, its first close above 1.3000 in a month. While traders are wary of their short positions in case a “Brexit rabbit is pulled from the hat”, no one is yet considering a long position.

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Trump likely to Implement further tariffs today

An escalation of the ongoing trade war between the U.S. and China is likely to drive the dollar today as President Trump is set to implement further tariffs on around $200 billion of U.S. imports from China. Retaliation from China will follow, and we will return to the status quo where U.S. goods entering China will cost more as will Chinese goods entering the U.S.

It seems that China may boycott forthcoming talks with the U.S., brokered by the WTO, at which they had been prepared to discuss opening their markets to U.S. goods, the whole reason for the dispute to begin with. They will not, however, negotiate under threat and thus if the tariffs are introduced today at the level expected the entire dispute will escalate with the knock-on effect that has already been seen for the dollar and emerging markets.

The dollar index has been falling since the middle of last month despite an attempted rally based upon further trade rumours at the start of this month which came to nothing. It made a low of 94.36 of Friday, its lowest level since the end of July but rallied a little to close at 94.98

This week is a light data week for the U.S., so rumour and counter-rumour regarding trade will likely be the primary driver.

Inflation data unlikely to concern ECB

Consumer price data will be released this week in both the UK and Eurozone. While UK inflation is set to have risen from 2.7% to 2.8% year on year in August, it is unlikely that there will have been any change in the prices in the Eurozone where inflation remains very well controlled.

The Bank of England has now raised rates twice this year but have so far failed to dampen inflation while in the Eurozone, the ECB is about as sanguine about inflation as it is about the value of the single currency.

When you look at the relative levels of volatility between the dollar and euro it comes as a surprise that EU Commission President Jean-Claude Juncker felt it right to promote the euro as a viable alternative to the dollar as the global reserve currency. The ECB clearly feels that the fewer “moving parts” there are in the Eurozone economy the easier it is to control, so the volatility associated with being the global reserve would probably be most unwelcome.

Eurozone inflation is likely to be unchanged at 2% year on year providing further support to the notion of no change to the monetary policy until Autumn 2019.

The subject of Mario Draghi’s replacement as ECB President continues to bubble below the surface with IMF Chief Christine Lagarde now apparently firmly in the running, which will interest BoE Governor Mark Carney who recently extended his tenure in his current role until January 2020.

The euro had a relatively strong week last week, reaching a high of 1.1722 and closing at 1.1623. However, it remains well within its recent range.