Resilient Pound Defies Brexit Concerns
May and Juncker’s relationship collapses
In what is set to become the most drawn out divorce ever, relations between the U.K. and E.U. have been soured even further. Agreement from the 27 remaining members that no negotiation over the future relationship will take place until the Brexit framework has been agreed has been followed by continued rancour over the fallout from the dinner between May and Juncker last week.
Theresa May, emboldened by the likely result of the upcoming General Election, has shown herself to be a tough leader. Building on her “no deal being better than a bad deal” mantra she has promised to be “bloody difficult” in her dealings with European Commission President, Jean-Claude Juncker.
The fact that Mrs May has to even deal with Juncker highlights one of the key issues critics have with the E.U. What role does Juncker, President of the European Commission, fill that is so different from Donald Tusk, President of the European Council?
The whole bloated bureaucracy of the E.U. is perceived as necessary in Brussels and as a waste of money in London.
Hard Brexit becoming more likely
Sterling continues to be well supported with traders accepting that whatever “bumps in the road” must be negotiated, in the end the E.U. and U.K. need each other too much for there to be no agreement.
There is good interest to sell the single currency above 0.8500. This interest is balanced by buyers ahead of support at 0.8380. The dollar continues to be in a reactive mode with the economic and political issues facing its trading partners providing direction for the dollar index.
Yesterday’s stronger than expected manufacturing data in the U.K. will likely be seen as a one off by BoE Governor Mark Carney as he prepares for next week’s MPC meeting.
The forward-looking inflation report will be of greater concern. The performance of the pound will have will have dampened future inflation fears somewhat but the peak could still be above 3% later this year.
Central Banks unlikely to provide much clarity
Leading indicators of economic activity remain subdued. Jobs data has been below trend for this stage in the economic cycle. The average over the past twelve months of 182k new jobs is well below the 250k that would have been expected in the past. More than two million jobs have been created in the past year which is a strong but not stellar performance.
The Fed is expected to shrink the size of its balance sheet as it further withdraws the extraordinary measures introduced to stimulate the economy as it emerged from the financial crisis.
Economists are concerned that central banks are generally taking longer than expected to withdraw stimulus. The Fed, BoE and ECB continue to promote growth through unnatural means calling into question to the true strength of the global recovery.
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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.”