Sterling gains as retail sales well above expectations

The pound rallied yesterday as economic data and a parliamentary vote that made a no-deal Brexit harder if not impossible combined to provide a more positive outlook.

Earlier in the day, the Office for Budget Responsibility had predicted that a no-deal Brexit would cost close to £30 billion. This figure is appreciably less than the £90 billion predicted by remain campaigners but significantly more than the £80 billion benefit predicted by leading Brexiteer MP Jacob Rees-Mogg. A fall in growth of close to £30 billion would lead to a recession next year as 2% would immediately be cut from UK GDP and the pound would collapse.

While the report contained nothing new other than adding some numbers to most people’s concerns, it sharpened the minds of MP’s who debated then voted upon a motion which would make it much more difficult for the UK to leave the EU with no-deal.

In the vote, 16 Government MP’s voted in favour while eight more, including Philip Hammond, the Chancellor of the Exchequer abstained. Hammond committed “political hari-kari”., almost certainly guaranteeing his removal from his role as the UK’s Finance Minister, once the new Prime Minister takes office.

Retail sales figures for June were released yesterday and they were far stronger than expected. Month on month ex-fuel retail sales rose by 1% following a downwardly revised 0.6% fall in May and a market expectation for a 0.3% fall. This led to a 3.8% increase year on year following a 2.2% rise in May which was also revised lower.

The pound rallied on the back of the data. The Parliamentary vote also added to the positive feeling as anything which stops a no-deal Brexit is viewed as encouraging for the economy and therefore the pound. It reached a high of 1.2555 versus the dollar and closed at 1.2548. Against the euro it reached a high of 1.1140, closing at 1.1128.

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Euro dips as the ECB discuss inflation

The single currency rallied versus a correcting dollar yesterday despite a rumour amongst traders that the ECB was discussing lowering its target for inflation. The rate of inflation in the Eurozone has been well below the target of 2% for some time but this is a curious move. To lower the target is tantamount to an admission that there is nothing the Central Bank can do to raise prices. The benefit to the ECB of this action would be while its “cupboard may be bare” when it comes to additional accommodation, the existing stimulus can remain in place longer.

The eurozone economy and therefore the single currency is likely to stay in the doldrums for the rest of this year at least and while a recession is not the analysts predicted outcome any recovery will be slow and long drawn out.

There is no doubt that global factors such as the ongoing trade talks between Beijing and Washington and tensions over Iran are having a destabilizing effect. However, the main issues facing the region are structural. Christine Lagarde the ECB President-elect has already mentioned that reforms will be high on her agenda when she takes office in November.

The euro rose to a high of 1.1280 against the dollar, closing just two pips lower at 1.1278.

Next week consumer confidence data, as well as manufacturing PMIs, will be released. The highlight of the week for the single currency will be the ECB meeting which is being held on Thursday. It is expected that Mario Draghi will announce what, if anything, can be done to improve the outlook for the economy.

Anything more than “one and done” could see the dollar soar

The dollar remains in the grip of “rate-cut fever” as traders look forward to the FOMC meeting at the end of the month. Speculation remains, once they cut rates at this meeting, about just how much advance guidance there will be about when there will be another.

The members of the FOMC have been reasonably clear that while they are in favour of the cut, they do not see the need (yet) for a series of moves. This highlights perfectly the indecision which has led to market speculation as to whether the Fed wants to be data-dependent while also acting in a proactive manner.

There is no doubt that proactivity is the course favoured by President Trump while economists and analysts prefer a little more caution. This is particularly true given the effect that U.S. monetary policy has on the wider global economy.

Data releases in the U.S. remain mildly positive for the economy so a cut which reverses the hike from last Autumn is pretty much all that can be expected but a lot depends on the preliminary release of Q2 GDP which will take place next Friday.

Before it meets on July 30/31, the FOMC will also receive an advance update on the July employment report which, if negative, will change considerably the tone of Jerome Powell’s speech following the meeting.

Yesterday, the dollar index continued its recent correction in anticipation of the rate cut. It fell to a low of 96.67, closing at 96.70.