Sterling at Ten Month High
August 1st: Highlights
- Dollar suffering as Trump turmoil grows
- MPC meeting to provide more questions than answers
- Benign Eurozone inflation ignored as Euro soars
Trump Presidency Descending into Chaos
The ability to govern is determined by the team that a President surrounds himself with and right now his Cabinet is in disarray. Past Presidents have accepted the counsel of trusted advisors but that is not the “Trump way”.
The dollar has fallen close to a two year low as the economy has suffered from benign neglect. Traders see no prospect of a stimulus package being determined, let alone passed, in the foreseeable future.
The dollar index closed at 92.79 and has fallen by 3.5% in the past month.
Trump’s new Chief of Staff Gen. John Kelly faces an uphill battle to bring stability where there is currently none. The best that can be hoped for is that the past six months be almost erased and the Presidency can “start afresh. It will take a complete overhaul of how the President operates and the best advice he can receive right now is to permit his team do its job.
MPC and Inflation report to provide advance guidance
At that time, there was an expectation that inflation would reach 3% and growth would start to recover. Since then, inflation has fallen from 2.9% to 2.6%, Q2 growth has been released at 0.3% and the IMF downgraded its full year GDP forecast.
The headwinds created by current political turmoil and Brexit contribute to the now almost certain vote to leave interest rates unchanged.
G7 Central Banks are “starting to prepare” to normalise monetary policy but we are still a long way from seeing wholesale rate hikes. The BoE and ECB are both concerned over killing off nascent growth in their respective economies and Japan fears deflation. Canada is the only G7 member who has hiked for a “genuine” reason. However even that decision is now being questioned as are rate hikes in the U.S.
Sterling is now being almost solely driven by Brexit. Ten Downing Street yesterday announced that official policy is still that free movement will end on 30th March 2019 when the U.K. officially leaves the EU.
This statement, designed to “head off” talk of a transition period clearly demonstrates the direction the Cabinet is headed and says more about Theresa May’s prospects than it does about Brexit.
Soaring Euro dampens inflation
Yesterday’s 1.3% read for June, unchanged from May, demonstrates that the current bout of Euro strength is having a dampening effect on prices. Concern will start to grow, as the common currency reaches towards 1.2000 against the dollar and 0.9000 versus Sterling, that currency strength will hamper export driven growth.
New found political stability and improving conditions, even in the weaker economies is being met with caution. Unemployment remains stubbornly high across the region although there has been a slight improvement with May’s figure being revised from 9.3% to 9.2% and June falling to 9.1%.
This week’s non-monetary policy of the ECB meeting will likely have Brexit close to the top of its agenda. The EU runs a trade surplus with the U.K. that needs to be carefully managed post Brexit. There is still the spectre of the “no deal better than a bad deal “mantra which, were it to happen, would leave a huge hole in the EU budget.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”