Johnson under pressure from rivals over domestic row

One of Leadership contender Boris Johnson’s supporters was asked in a TV interview if Johnson has the “magic formula” to deliver a deal on Brexit to allow the UK to leave the EU on 31st October? He confirmed that he believed he did and when asked what the key was, he replied that Johnson is prepared and willing to undertake a no deal departure.

Brussels knows and believes that he is prepared to take the UK out of the EU with no deal and that threat could be enough to ensure that there is some re-negotiation of the Withdrawal Agreement.

That may be so, and it remains to be seen what will happen should Johnson become Leader of the Conservative Party and therefore Prime Minister. The markets certainly believe he has the mettle to take the UK out with no deal. However, to believe that his coronation as Prime Minister will give him the mandate to do this is a mistake. Remainers and those calling for a second referendum will say that gaining a majority from 160k Party members is vastly different from being supported by a majority of the entire country.

Despite the distraction from the “non-story” of his domestic situation, Johnson retains a healthy lead over his opponent Jeremy Hunt and Sterling has fallen consistently versus the single currency over the entire campaign. On Friday it reached a low of 1.1177, within touching distance of a five-month low of 1.1142. Versus a correcting dollar, it rose to a high of 1.2749, closing at 1.2743. The dollar is reacting to market expectations of a rate cut (see below).

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Trump’s “economic dream” only needed Fed endorsement

President Trump has had a long-held view that the U.S. has been taken advantage of by its trading partners which have either allowed their currencies to weaken naturally or given them a helping hand using dovish monetary policy.

Jerome Powell, the Chairman of the Federal Reserve, has proven to be a “tougher nut to crack” than Trump realized when the appointed him early last year. By moving away from the tradition of Fed Chairmen who came from an economics background, Trump was expecting to be able to easily bend Powell to his will. His public criticism of the FOMC’s deliberations over the economy had fallen on deaf ears and it is only now following last week’s meeting that the Fed has given a strong hint that a rate cut is imminent.

Trump’s demand for a weaker dollar and a stronger DJI has been realized with the DJI making a year’s high on Thursday and Friday, although it did correct later on Friday. With the futures markets predicting 100% certainty that rates will be cut at the July FOMC at the end of next month, a lot will depend on how hawkish Powell remains in his post-meeting press conference.

He may signal that a single cut is sufficient in the short term as a signal of Fed vigilance which would probably undo the verbal intervention that has moved the dollar to a three-month low and seen the rally in the DJI.

Next week’s employment report will be an important indicator for the Fed as will consumer-driven data such as confidence and retail sales. Employment has been running at close to analyst’s expectation on a three-month average basis, but should the June report be poor, the Fed’s resolve may be tested as market expectation will be for a series of cuts.

On Friday, the dollar index reached a low of 96.15, closing at 96.20. Given the concerns over Brexit in the UK and the continued slowdown in the Eurozone, and that the pound and euro make up a combined 69.5% of the index, the current weakness may be proven temporary unless the Fed becomes considerably more dovish.

Eurozone activity could be “bottoming out”

Manufacturing activity in Germany and the Eurozone as a whole remains weak and in a period of contraction. However, Friday’s release of data for June showed signs that the worst could be coming to an end. In Germany, Manufacturing PMI was at 45.4 compared to 44.3 in May and a market expectation of 44.5. For the entire Eurozone, the data was a little less encouraging at 47.8, compared to 47.7 in May but below analyst’s expectation of 48.00.

Given that the rate of contraction had been slowing and with these numbers possibly indicating a slow but steady improvement, it may be that the worst is soon to be over for the Eurozone economy.

There is still a long way to go before the economy shows any expansion, but should inflation also start to pick up, ECB President Mario Draghi’s prediction over rate hikes may not seem as fanciful as the markets had believed.

Today’s release of the market expectations data from the Munich based IFO Institute will be more closely inspected following Friday’s data. The report which covers business climate, current conditions, and expectations for the German economy is expected to show a modest improvement on last month which will be another positive development.

With more confidence surveys to be released later in the week, the euro may start to show a degree of resilience particularly versus a weaker dollar and continue its rally versus the pound.

1.1000 remains a target for the single currency versus Sterling, although for now, that looks some way away.

On Friday the euro reached a high of 1.1378 versus the dollar, closing at 1.1369.